Australian CPI summary. Weekly update as at Monday 29 August 2016

The following chart shows the daily price change of Australian CPI basket of goods and services over the last 30 days.

The following chart shows the price levels of each of the top level Austalian CPI basket of goods and services.

Australian CPI summary. Weekly update as at Monday 22 August 2016

The following chart shows the daily price change of Australian CPI basket of goods and services over the last 30 days.

The following chart shows the price levels of each of the top level Austalian CPI basket of goods and services.

Australian CPI summary. Weekly update as at Monday 15 August 2016

The following chart shows the daily price change of Australian CPI basket of goods and services over the last 30 days.

The following chart shows the price levels of each of the top level Austalian CPI basket of goods and services.

Is the CPI a good proxy for monetary inflation?

The Consumer Price Index (CPI) is a relative price index based on a basket of consumable goods.  The mix of the items in the CPI basket are determined by consumer surveys, that essentially ask "What do you spend your disposable income on?".  These survey's are carried out every 5 years or so, and after each survey, the composition of the basket of goods is adjusted to align with current consumer spending.

By tracking the prices of items that consumer actually spend their money on, and in the proportions that it is spent, the CPI effectively tracks the cost of living for the consumer.

Often the CPI is used as a proxy for the falling value of a dollar.  That is, if consumer price inflation is tracking at 2% per annum, this is most likely caused by the currency devaluing at 2% per annum.  Thus, the CPI is a reasonable proxy for determining the impact to the consumer of monetary inflation (currency devaluation).

There are, however, some limitations to this approach.  Most obviously, based on the charts here at the TPP, is that some of the items in the CPI basket are highly volatile, primarily petrol (oil) and hotels, and thus the entire index tends to be highly volatile as a result.

One of the goals of the TPP is to create an up to date, non-volatile inflation index.  Such an index could then be used to show runaway inflation as it was (i.e., at the time that it was) occurring.

There are a number of existing approaches to reducing the volatility of a price index.  Briefly, they include a) removing the volatile items from the index, b) measuring price changes over longer time periods.   Neither of these approaches satisfactorily meets the goal to create an "up to date, non-volatile inflation index".

Instead, I intend to use an alternate, unweighted, basket of goods.  That is, each item appears in the basket once on an equal weighting with every other item in the basket.  One price, one vote, so to speak, dubbed the  "All Items Consumer Price Index" (AICPI).

Of the 10000 or so prices that are captured daily, the vast majority are not volatile.  They rarely change price.  So, the few percent of items that have highly volatile prices will not impact the index to any significant degree.

On the other hand, if the currency itself were to devalue, by, say, 5%, we would expect that to re-price the majority of goods quickly, and so should clearly show up in the new price index.

So, whilst the AICPI will not track the consumer "cost of living" as accurately as the CPI does, it will, being an "up to date, non-volatile inflation index", hopefully, be a better proxy for monetary inflation than CPI for the purposes of the TPP.

Australian CPI summary. Weekly update as at Monday 8 August 2016

The following chart shows the daily price change of Australian CPI basket of goods and services over the last 30 days.

The following chart shows the price levels of each of the top level Austalian CPI basket of goods and services.