(Image: AAP/Deam Lewins)

Wednesday’s release of the September quarter consumer price index (CPI) will be the last under the current method of weightings. The next CPI report, when released early in 2018, could very well signal a fall in th

e index because of an important, upcoming change in the Australian Bureau of Statistics’ (ABS) methodology for calculating CPI.

While the September quarter figures could be one of the biggest for four years, thanks to the surge in electricity and gas prices, the December quarter CPI released late next January will show the impact of the first of what will be yearly changes to the weightings. The changes are being made to try to capture the rapid change of technology, including the rising quality and options in various products such as smartphones. The changes will also help the ABS better capture the impact of new companies and products, such as Amazon. The thing to watch will be the impact, if any, on the Reserve Bank of Australia’s (RBA) preferred core inflation measures: the trimmed mean and weighted median.

In its May Statement on Monetary Policy, the RBA explained why the changes will be made:

“Measured CPI inflation is known to be upwardly biased because the weight assigned to each expenditure class is fixed for a number of years. This means that the CPI does not take into account changes in consumer behaviour in response to relative price changes (known as ‘substitution bias’). As a result, the forthcoming re-weighting is expected to reduce measured inflation, although it is hard to predict by how much because the effects of past re-weightings have varied significantly and are not necessarily a good guide to future episodes. The ABS plans to re-weight the CPI annually in future, which will reduce substitution bias on an ongoing basis.”

“Substitution bias” is a weakness in the CPI that overstates inflation because it does not account for the substitution effect, when consumers substitute one good for another, after its price becomes cheaper than the good they previously bought. It has bedevilled statistical bodies and others because of the rapid changes and improvement in digital technology (the US Federal Reserve for months blamed lower-than-forecast US CPI on changes to the phone plans of US telcos). It’s an important reason why many economists think the conventional price measurement series such as the CPI have consistently overstated price pressures in recent years.

Meantime, policymakers here and overseas remain convinced that inflation is just around the corner, as strong jobs growth starts to drive cost pressures. They might continue to be disappointed.