Written byThe consumer price index (CPI) is Australia's main measure of inflation: how the prices of a basket of goods and services bought by households change over time.
Also known as: CPI, consumer price index, CPI inflation, inflation rate
Key points
- The percentage change in the CPI over a year is what people mean by inflation, and it is the figure the RBA targets.
- Movements in the CPI feed into cash rate decisions, and from there into variable rate loan repayments.
- The ABS publishes a full CPI every month, alongside underlying measures such as the trimmed mean that strip out volatile price moves.
- Many tax thresholds, government charges and contract prices are indexed to the CPI, from the luxury car tax threshold to commercial rents.
How the CPI is built
The ABS prices thousands of items each month, grouped into 11 categories such as food, housing, transport, health, education and insurance and financial services. Each item is weighted by how much of the household budget it takes up, and the index tracks the percentage change in the cost of that weighted basket across the capital cities.
Because it is an average across all households, the CPI is not designed to match any one family's costs. A renter with a long commute and a mortgage-free retiree feel very different inflation, which is one reason the ABS also publishes the figures by group and by city.
Headline versus underlying inflation
The headline CPI counts every item, including ones that swing with the weather or world oil prices. To see the trend underneath, the ABS also calculates the trimmed mean, which drops the largest rises and falls and averages the middle 70 per cent of price changes by weight, and the weighted median, the price change sitting at the midpoint of the basket.
The RBA's target is set in terms of headline CPI, but it leans on the trimmed mean to judge whether inflation is really heading back into its target band. When the two diverge, as they often do, the underlying measure usually decides the tone of the next rate decision.
What the CPI means for your loan
If inflation runs above the RBA's band, the cash rate tends to rise or stay high, and lenders pass that through to variable rate home, car and business loans. If it falls back, the pressure runs the other way. That makes the monthly CPI the single most useful release for anyone deciding between a fixed rate and a variable one.
For a business the CPI also describes what is happening to your own costs and your customers' budgets, and lenders build an inflation view into serviceability buffers. The interest you pay is only part of the story; the CPI tells you what the dollars you repay with are worth.
Example
A couple in Hobart are a year into a variable rate home loan and their lender has offered them a fixed rate. The latest monthly CPI shows headline inflation easing but the trimmed mean still sitting above the RBA's target band, and the economists their lender quotes expect the cash rate to hold for a while yet. They compare the fixed offer against what their variable repayments would be under a small rise and a small cut, then split the loan and fix half for two years, so a further hike is not a shock while the variable half still benefits if rates fall.
Not to be confused with
Frequently asked questions
Is CPI the same as inflation?
Near enough in everyday use. The CPI is the index; inflation is the percentage change in that index over a period, usually a year. When the news says inflation is running at a certain rate, it is quoting the annual change in the CPI, or sometimes in an underlying measure like the trimmed mean.
How often is the CPI released in Australia?
Every month. The ABS moved from a quarterly CPI to a complete monthly index, released about four weeks after the end of the month it covers on a date published in advance. Quarterly summaries still appear, but the monthly figure is now the one markets and the RBA watch most closely.
What is the trimmed mean?
An underlying inflation measure the ABS publishes alongside the headline CPI. It removes the items with the largest price rises and the largest falls in the period and averages the middle 70 per cent by weight. The idea is to show the persistent trend without one-off spikes in fuel, fruit or holiday travel.
Does the CPI affect my loan repayments?
Indirectly, and mainly if you have a variable rate. The RBA sets the cash rate to keep CPI inflation within its target band, and lenders move variable rates with the cash rate. Fixed rate loans do not change during the fixed term, but the rate you are offered when you fix reflects where lenders expect inflation and the cash rate to go.
What does CPI indexed mean?
That an amount is adjusted in line with the CPI, usually once a year. Tax thresholds such as the luxury car tax threshold, government fees, some superannuation caps and many commercial leases and supply contracts are CPI indexed, so the dollar figure rises when the index does. Check the current figure with the ATO or the contract rather than assuming last year's number.
Related terms
ABS
The ABS is the Australian Bureau of Statistics, the independent national agency that produces Australia's official figures on inflation, jobs, spending and population.
Read definitionRBA
The RBA (Reserve Bank of Australia) is Australia's central bank: it sets the cash rate that flows through to loan and savings rates, and operates key payment settlement systems.
Read definitionCash rate
The cash rate is the interest rate the RBA targets for overnight loans between banks, the benchmark that anchors short-term funding costs and influences most Australian lending rates.
Read definitionVariable rate
A variable rate is an interest rate that can move up or down over the life of a loan, following the lender's benchmark and its margin.
Read definitionFixed rate
A fixed rate is an interest rate locked in for a set term, so the rate and usually the repayments do not change until that term ends.
Read definitionInterest
Interest is the price of using money: what a borrower pays on a loan, or a saver earns on a deposit, expressed as a percentage rate on the principal.
Read definitionGo deeper
Sources
This article is general information only and is not financial advice.