Reserve Bank ignores petrol price in inflation measures
By John Rolfe and Kelvin Bissett August 04, 2008 12:00am
SPIRALLING petrol prices have not been included in inflation measurements used by the Reserve Bank board in 18 of the last 21 quarters - a period when interest rates were put up eight times. The Reserve Bank's tool for assessing inflation trends, the so-called "trimmed mean" Consumer Price Index measure, has frequently removed petrol out of the measures because of its volatility, the Daily Telegraph has learned. Petrol and many other common types of household budget items that have risen strongly in price - causing pain across the economy - often are stripped from the basket of 90 goods and services classes each quarter used to make inflation predictions. Documents obtained under Freedom of Information on goods and services removed from the trimmed mean in each quarter, reveal basic family staples including fuel, vegetables, water, meats, sewerate and water rates, childcare and even the price of eggs are frequently dismissed from consideration. The cost of fruit was the most frequently removed from the trimmed mean CPI measure, removed on 20 out of 21 quarterly measures. The details of the Bank's trimmed mean measure can be revealed as the Bank faces growing criticism that recent increases in rates were too much, placing the nation on the brink of recession. Figures released last week by the Australian Bureau of Statistics showed that nation is already in a retail recession. Petrol, which has surged from about 90 cents a litre in early 2003 to more than $1.50 now, has been part of its controversial trimmed mean CPI model in only three quarters since March 2003. Reserve Bank head of information Jacqui Dwyer said the trimmed mean CPI was the Bank's preferred measure for making judgements "about the future direction" of inflationary pressures. She said it was often a better measuring tool for inflation than the overall CPI as it measures underlying inflation. However, Ms Dwyer said the trimmed mean was not the only tool and the Bank and the Board "use different measures of inflation for different purposes". "Items like petrol, grocery items and childcare are included in the inflation measure we look at to examine what is happening to households' real income and households' spending," she said. Under the trimmed mean inflation model, economists strip away the 15 per cent of products with the fastest rising prices and the bottom 15 per cent slowest items with slowest rising prices before establishing its inflation figure. Documents provided to this newspaper list precisely when item classes have been removed from the inflation movements when determining the trimmed mean. At the last interest rate rise announced on March 4, the Board relied on December 07 trimmed mean figures which deleted changes in items including petrol, milk, cheese bread, breakfast cereals, beef, pork, poultry, processed meats, bacon and ham, eggs, tea and coffee, pet food, fruit, vegetables, vehicle costs.
