Price Stability

Measurement Limitations

No measure of inflation is perfect. Unless everyone in the economy starts buying exactly the same goods and services, the measure of inflation can never be perfect. However, it is hoped that the inflation measure used in Australia provides us with a figure which represents a “best fit” – it is the rate of inflation as it affects the purchasing power of the average individual.

Limitations of the existing measure of inflation include the following:

The survey is completed only in the capital cities, which means that regional centres are not represented. This can be very significant – price changes in Manangatang in the north of Victoria may not have a large impact on the overall inflation rate, but the combined impact of large regional cities such as Geelong and the Gold Coast can.
The weighting procedure can never be entirely accurate. Statisticians work diligently to ensure that the weights used to adjust the observed prices really do reflect the spending patterns of Australians. However these spending patterns are also established via a survey. Also, even if the weights are a fair representation of our overall spending patterns, they will never be able to reflect the changes for each one of us individually.
The regimen takes time to be updated. New products are released all the time, and often it can take several years before they will appear in the regimen. As a result, spending on very new products will not be represented in the observed rate of inflation.
Quality differences are difficult to acknowledge. If you buy a packet of chips today, and then buy another in 10 years, it is reasonable to assume that the quality is fairly similar. However, if you buy a car or a computer, improvements in technology mean that these items are improving all of the time. It is difficult for the ABS to recognize these changes in any measure of inflation.
The regimen includes around 80,000 items. While this is obviously very extensive, it is by no means complete. As such, it will never be able to represent the total impact on spending power of ALL individuals; it doesn’t cover everything that we ALL buy.
The “I” in CPI stands for “Index”. That is, we are comparing figures to a base year. It is vital that the base year which is selected is representative. If not, any variations may only be recorded because they are the norm, while the base year is actually the anomaly.

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