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The ABS-produced Consumer Price Index (CPI) measures inflation for a basket of good and services in the 8 Capital Cities and then uses that data to produce a weighted average for the nation. This is the headline inflation number with which we are all familiar; and in the second quarter of 2021 (most recent data) came in at +0.8% q/q for a year-on-year increase of 3.8%.
However, there is no recognition of the regional areas of Australia in this data.
How do the different spending patterns in the regions impact on the effect of price changes within the CPI basket of goods and services?
Every six years the Household Expenditure Survey (HES) provides details about expenditure patterns across the nation; it also provides this data split between the Capitals and the Rest of the States. The HES is the data upon which the ABS base their various expenditure groups’ weightings within the CPI basket (also nowadays updated annually using Household Final Consumption Expenditure from the national accounts, although this is not available to us at the Capital/Rest of State level). The last HES was released in July 2017.
By analysing the HES data, along with the available CPI Index data at Capital level, we are able to adjust the weightings within the CPI basket for the Rest of State and construct an estimated regional CPI. We are concerned with the change in the index, rather than the actual quantum, given that there is no practical way that we can source the kind of extensive price information the ABS use to create their Capital City indexes. For example, although grocery prices might generally be higher in a Region than the Capital we are forced to assume that the rate of change for grocery prices is the same across the State when calculating the regional CPI. It is differences in the weighting of expenditure groups within the CPI basket that lead to Capital/Regional differences.
Having created these regional State CPIs we can then weight them all (Capitals and Regions) to create an ‘All Australia’ CPI in much the same way the ABS do for their Weighted Capital City Average CPI. Doing so shows ‘All Australia’ CPI was +0.8% q/q and +4.0% y/y in the second quarter.
The results of this exercise for the 6 States (regional data for the Territories is not available in the HES) is in the chart below. It is noticeable that, with the exception of Tasmania, all State Regions are experiencing higher inflation than their Capital City. Regional Queensland is facing the second highest inflation (behind only Darwin) at 5.3% y/y.
For further information regarding methodology or more detail please contact pete@conus.com.au
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