RDP 9510: Modelling Inflation in Australia Appendix 1: Data Definitions

This appendix describes the data. Sections 1–7 list the definitions of the data and give their sources. Section 8 gives a detailed derivation of the underlying consumer price index. All data are quarterly, and the sample period is 1976(3)–1993(3). Seasonally adjusted series are denoted by SA, those not seasonally adjusted by NSA; and the Australian Bureau of Statistics is abbreviated as ABS.

1. Headline Consumer Price Index (P^h)

Definition. The consumer price index.

Units. 1989/90=100. (NSA)

Source. Consumer Price Index, ABS Catalogue No. 6401.0, Table 1.

2. Underlying Consumer Price Index (P)

Definition. The consumer price index, excluding fresh fruit and vegetables, mortgage interest and consumer credit charges, automotive fuel, and health services. The adjustment is explained and illustrated in Section 8 of this appendix.

Units. 1989/90=100. (NSA)

Source. Consumer Price Index, ABS Catalogue No. 6401.0, Table 7.

3. Unit Labour Costs (ULC)

Definition. Nominal cost of non-farm labour per unit of non-farm output. Nominal unit labour costs are defined as:

where wss refers to the wages, salaries and supplements of non-farm wage and salary earners. The class “wage and salary earners” is only a subset of all employed people in the non-farm economy, since it does not include the self-employed, employers, and unpaid family helpers who have a (non-farm) job or business. Unit labour costs of wage and salary earners are scaled up to that for all employed by multiplying it by the ratio of hours worked by all employed people in the non-farm sector to the hours worked by non-farm wage and salary earners.

Units. Unit labour costs are indexed at 1966(3)–1973(2)=100 though, in this paper, the index is rebased at 1989/90=100. (SA)

Source. Department of the Treasury, unpublished data. Recent data are listed in Australian Economic Indicators, ABS Catalogue No. 1350.0, Table 9.5, as “non-farm sector (nominal) Treasury index of average unit labour costs”.

4. Import Prices (IP)

Definition. Tariff-adjusted import price index of merchandise imports, excluding exogenous imports, computers, and other lumpy import items.

Import prices are measured as the implicit price deflator on seasonally adjusted merchandise imports, excluding exogenous imports, computers and other lumpy import items. Exogenous imports are goods which are lumpy in nature, subject to government arrangements or significantly affected by factors other than the general level of economic activity in Australia. Specifically, this covers fuel, defence equipment, and ships, aircraft and other large items of equipment acquired by selected public and private enterprises. “Other lumpy import items” are those lumpy items which are similar in nature to exogenous imports but are not included in that category. For example, the purchase of an aeroplane by QANTAS is classified as an exogenous import, while the purchase of a tanker for the export of liquid natural gas (LNG) is classified as an other lumpy item.

The tariff rate is the ratio of taxes on international trade to the value of endogenous imports. The import implicit price deflator is multiplied by unity plus the tariff rate in order to derive tariff-adjusted import prices.

Units. The base period for the constant price series of merchandise imports is 1989/90=100. (SA) Taxes and the value of endogenous imports are measured in $A millions. (NSA)

Source. The constant and current price series of merchandise imports less exogenous items are taken from Balance of Payments, Australia, ABS Catalogue No. 5302.0, Tables 13 and 14. The constant and current price series of computers are unpublished data provided by the ABS. The constant and current price series of other lumpy items are unpublished data provided by the Department of the Treasury. Taxes on international trade are drawn from Australian National Accounts, ABS Catalogue No. 5206.0, Table 40, “Taxes, Fees and Fines”.

5. Petrol Prices (PET)

Definition. Automotive fuel price index.

Units. 1989/90=100. (NSA)

Source. Consumer Price Index, ABS Catalogue No. 6401.0, Table 7.

6. Private Final Demand (Y)

Definition. Private final consumption expenditure and private gross fixed capital expenditure, excluding net second-hand purchases of equipment and non-dwelling construction from the public sector.

The variable y^res is the residual of the log of private final demand regressed on a constant and trend for the full data period.

Units. Private final demand is measured in $A millions, 1989/90 prices. (SA)

Source. Australian National Accounts, ABS Catalogue No. 5206.0, Table 59.

7. Unit Capital Costs (UCC)

Definition. Nominal cost of capital per unit of output.

The nominal unit capital costs are estimated as:

where “non-farm GOS” means the “non-farm gross operating surplus of private corporate and unincorporated trading enterprises and public trading enterprises”. Non-farm gross operating surplus of trading enterprises is calculated as total GOS of trading enterprises (excluding dwellings) less farm GOS. Real non-farm GDP(A), which is the average of the expenditure, income and production measures of GDP, is used in the denominator.

Units. 1989/90=100. All variables used for constructing unit capital costs are seasonally adjusted.

Source. Australian National Accounts, ABS Catalogue No. 5206.0, Tables 55, 65, and 73.

8. Derivation of the Underlying Consumer Price Index

The underlying consumer price index is defined as the total (headline) CPI, less fresh fruit and vegetables, mortgage interest charges, consumer credit charges, automotive fuel, and health services. This adjustment eliminates the sources of many of the breaks and of much of the volatility in the total CPI series. The derivation of the underlying CPI series is as follows.

8.1 Estimated Contributions

The underlying CPI series is calculated by subtracting the contributions for each of the excluded items from the total CPI. The data source for the contributions is the ABS publication Consumer Price Index, Catalogue No. 6401.0, Table 7. For example, the adjustments for 1993(3) appear in the following table.

Quarterly percentage changes are calculated using the adjusted series.

8.2 Changes in Weights

Breaks in the adjusted series occur, however, wherever the CPI has been reweighted. Since the contribution of each series to the CPI is provided at both the old and new weight when the weight is changed, estimation of the growth in the index is straightforward. Consider, for example, the reweighting at 1992(2). The published series contains data to 1992(1) at the 11th series weights and data at the 12th series weights thereafter. Data for 1992(2) are supplied at both the 11th and 12th series weights, as shown in the following table.

These weights imply that the underlying CPI grew by 0.58 per cent in 1992(2).

A similar calculation is made for the 1986(4) 11th series reweighting, with the exception that mortgage interest charges and consumer credit charges were not considered since they were not included in the 10th series CPI. No adjustment has been made for the 1982 10th series reweighting since there is no break in the automotive fuel series (see below), and the weighting changes in fruit and vegetables and health services broadly offset each other.

8.3 Adjustments before 1982 for Automotive Fuel

Automotive fuel poses a special problem in that it was not separately identified in the CPI in the (pre-1982) 9th series, and so no contributions series exists. An index exists for the price of automotive fuel, beginning in the early 1970s, but no weight for the 9th series is currently available. Instead, the 10th series automotive fuel weight was used to determine the contribution of the automotive fuel price index to the CPI for the 9th series. While this adjustment does not reflect the true weight of petrol in the CPI before 1982, it is a reasonable approximation to make with existing data.

8.4 The Underlying Consumer Price Index

The underlying CPI is constructed using the percentage changes calculated above, and is rebased at 1989/90=100.