Is the CPI “cost-of-living index” flawed in the Digital Economy?

Watching the TV the other day listening to more bad retail news with reports coming in that the latest CPI index has risen 3.7%. This got me thinking, how is this index measured and does it take into account the people making purchases online?

After some investigation online with Australian Bureau of Statistics (ABS), found that the definition of the CPI index is this, “The CPI measures the change in the cost of purchasing a fixed basket of goods and services. The basket represents the purchases made by a particular population group in a specified period.” It goes on…“The basket of goods and services used in the CPI is chosen to represent the spending pattern of all private households in metropolitan areas.”

I then wondered how this information was gathered, and found this “Prices for more than 2/3 of specifications are collected on a monthly basis, overwhelmingly by direct observation by trained Field Officers.” I am pretty sure these “Field Officers” don’t surf the Web to check the cost of purchasing a fixed basket of goods and services.

The CPI is a measure of pure price change (i.e., price change excluding the effects of any change in quality or quantity of the goods or services concerned). The objective is to measure each quarter the change in the cost of purchasing an identical basket of goods and services since the previous quarter. Because, in the real world, the qualities and quantities of goods and services available for consumers to purchase are continually changing, a substantial proportion of the effort of compiling the CPI goes to assessing the effect on prices of these changes and making appropriate adjustments before compiling the CPI.

Is it fair to assume that the average Australian purchases everything in bricks & mortar stores? Maybe it is however there is a huge online market going on that is estimated to be worth $30Billion this year (2011). Also add to the fact that many new e commerce stores are online only such as eBay, oo.com.au, Amazon, Kogan, Fishpond, TopBuy etc. so how are their prices added into the equation? Should there be a DCPI (Digital Consumer Price Index) as well?

A more comprehensive formal description of the Australian CPI therefore is: “a measure of changes, over time, in retail prices including online, of a constant basket of goods and services representative of consumption expenditure by resident households in Australian metropolitan areas.”

If the Australian Parliamentary Library states that “The benefits of e-commerce to the economy in terms of reduced costs, higher quality, new products and larger markets are significant”, then why isn’t it measured as part of the CPI? And as the CPI is a direct factor of inflation and therefore interest rates then the whole economy may be on a shift from where it really is. Is it possible that the cost-of-living in Australia is actually in a better state then we think?

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