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Using Engel Curves to Estimate the Bias in the Australian CPI

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  • GARRY F. BARRETT
  • MATTHEW BRZOZOWSKI

Abstract

The Australian consumer price index (CPI) is a Laspeyres price index which is subject to a number of well-known biases. In this article we evaluate the performance of the Australian CPI as a true cost of living index by comparing CPI-deflated food Engel curves estimated with the Australian Bureau of Statistics Household Expenditure Surveys. Our findings indicate that the Australian CPI overstated the change in the general cost of living between 1975/1976 and 2003/2004 by 34 per cent. The CPI was especially inaccurate for single adults and lone mother families. In contrast, the CPI was relatively accurate in measuring the change in the cost of living for two-adult and working families. Copyright © 2009 The Economic Society of Australia.

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  • Garry F. Barrett & Matthew Brzozowski, 2010. "Using Engel Curves to Estimate the Bias in the Australian CPI," The Economic Record, The Economic Society of Australia, vol. 86(272), pages 1-14, March.
  • Handle: RePEc:bla:ecorec:v:86:y:2010:i:272:p:1-14
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    References listed on IDEAS

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    1. James Banks & Richard Blundell & Arthur Lewbel, 1997. "Quadratic Engel Curves And Consumer Demand," The Review of Economics and Statistics, MIT Press, vol. 79(4), pages 527-539, November.
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    6. Erling Røed Larsen, 2007. "Does the CPI Mirror the Cost of Living? Engel's Law Suggests Not in Norway," Scandinavian Journal of Economics, Wiley Blackwell, vol. 109(1), pages 177-195, March.
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    Cited by:

    1. HIGA, Kazuhito, 2014. "Estimating Upward Bias of Japanese Consumer Price Index Using Engel's Law," Discussion Papers 2014-21, Graduate School of Economics, Hitotsubashi University.
    2. Ingvild Almas & Anders Kjelsrud & Rohini Somanathan, 2013. "A Behaviour-Based Approach To The Estimation Of Poverty In India," Working papers 226, Centre for Development Economics, Delhi School of Economics.
    3. Onur Sunal & Özge Sezgin Alp, 2016. "Effect of different price indices on linkage between real GDP growth and real minimum wage growth in Turkey," Journal of Economic and Financial Studies (JEFS), LAR Center Press, vol. 4(1), pages 1-10, February.
    4. Susan Olivia & John Gibson, 2013. "Using Engel curves to measure CPI bias for Indonesia," Bulletin of Indonesian Economic Studies, Taylor & Francis Journals, vol. 49(1), pages 85-101, April.
    5. Emi Nakamura & Jón Steinsson & Miao Liu, 2016. "Are Chinese Growth and Inflation Too Smooth? Evidence from Engel Curves," American Economic Journal: Macroeconomics, American Economic Association, vol. 8(3), pages 113-144, July.
    6. Chamon, Marcos & de Carvalho Filho, Irineu, 2014. "Consumption based estimates of urban Chinese growth," China Economic Review, Elsevier, vol. 29(C), pages 126-137.
    7. Scrimgeour, Dean & Gorry, James, 2015. "Using Engel Curves to Estimate CPI Bias for the Elderly," Working Papers 2015-03, Department of Economics, Colgate University, revised 08 Jun 2015.
    8. Almås, Ingvild & Johnsen, Åshild Auglænd, 2012. "The cost of living in China: Implications for inequality and poverty," Discussion Paper Series in Economics 21/2012, Norwegian School of Economics, Department of Economics.
    9. John Gibson & Trinh Le & Bonggeun Kim, 2017. "Prices, Engel Curves, and Time-Space Deflation: Impacts on Poverty and Inequality in Vietnam," World Bank Economic Review, World Bank Group, vol. 31(2), pages 504-530.
    10. Filho, Irineu de Carvalho & Chamon, Marcos, 2012. "The myth of post-reform income stagnation: Evidence from Brazil and Mexico," Journal of Development Economics, Elsevier, vol. 97(2), pages 368-386.
    11. Erling Røed Larsen, 2014. "Is the Engel curve approach viable in the estimation of alternative PPPs?," Empirical Economics, Springer, vol. 47(3), pages 881-904, November.
    12. Gaddis,Isis, 2016. "Prices for poverty analysis in Africa," Policy Research Working Paper Series 7652, The World Bank.
    13. Kazuhito Higa, 2013. "Estimating Upward Bias in the Japanese CPI Using Engel's Law," Global COE Hi-Stat Discussion Paper Series gd12-295, Institute of Economic Research, Hitotsubashi University.
    14. David Jacobs & Dilhan Perera & Thomas Williams, 2014. "Inflation and the Cost of Living," RBA Bulletin, Reserve Bank of Australia, pages 33-46, March.
    15. Majumder,Amita & Ray,Ranjan & Santra,Sattwik, 2015. "Preferences, purchasing power parity, and inequality : analytical framework, propositions, and empirical evidence," Policy Research Working Paper Series 7395, The World Bank.

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