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CPI to be reset to 100.

08/09/2012

The Australian Bureau of Statistics maintains consumer prices indices which track the changes in the price of a basket of goods and services, commonly acquired by domestic consumers. Indices are determined each quarter for each of the eight provincial capital cities. A weighted average is mathematically calculated for the 8 capital cities. The basket does include every consumer item available for retail sale, but is representative of the buying habits of households. Each quarter, the ABS collects price data about approximately 100,000 products. However, the index is reflective of the change in prices for a much wider range of goods and services than is actually surveyed by the ABS. That basket is not changing on this occasion. The weighting, scope and coverage given to particular goods and services included in the indices was reviewed last year. The CPI is a favourite comparator for price indexation in many long-term commercial contracts, despite it not being a comprehensive price indicator for all goods and services traded in the Australian economy. There are other indices which may be more appropriate measures for particular markets. For example, the domestic final demand index might be a better measure of the cost inflation affecting Australian institutions.

Contract prices are often indexed to CPI movements between two time periods. A price increase can be calculated by dividing the change in index points by the base price index. If the CPI (All Groups, Average of 8 Capital Cities) at 30 July 2012 is taken as the base price index, the index re-set will mean that CPI escalation should use 100 as the denominator, rather than 180.4. But if the base price index reflects an earlier point in time, the denominator must be adjusted to reflect the re-referenced CPI. I expect the ABS will publish a conversion factor in October 2012 to calculate the true differences for each CPI group over time. However, many commercial contracts will not expressly allow this adjustment. In those cases, the contractual parties will need to negotiate how that conversion factor should be applied to reflect the true CPI increase.

Here is a link to the CPI webpage published by the ABS.

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