What happens when Australia’s inflation basket gets reweighted?

in briefThe latest CPI data shows inflation accelerating, with transport, housing and food among key drivers.The ABS is about to reweight the CPI basket of goods to produce a better measure of inflation.

Last week, the Australian Bureau of Statistics (ABS) reported an unexpected spike in inflation in September, prompting fears of more interest rate hikes.

According to the ABS Consumer Price Index (CPI), Australia’s annual inflation rate sits at 4.3 per cent — up from 4 per cent in August.

Amongst the largest contributors to rising inflation were housing, which rose 5.2 per cent; alcohol and tobacco, which rose 4.3 per cent and health, which rose 3.7 per cent.

The ABS will be reweighting the CPI basket of goods in January to better reflect current spending trends and produce a more accurate CPI, a crucial exercise as Australians adjust their spending amid continued rising costs.

According to retail expert at the University of Sydney Business School, Lisa Asher, a reweighting exercise is undertaken to “adequately reflect” what people are “actually spending” their money on.

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While a change usually occurs at the end of each year, the ABS had postponed the 2026 change to January. The last reweight was in late 2025.

“Some of the key changes or movements that we saw last year and this year focus much more on the increase in food and non-alcoholic beverages, as a larger percentage, as well as health costs and transport,” Asher said.

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While the ABS does not flag early what the new weightings may look like, previous changes offer some clues.

In 2025, the biggest weighting increases were in education, health and food and non-alcoholic beverages and the larger weight decreases were in furnishings, household equipment and services, alcohol and tobacco and housing.

What is the CPI and how is calculated?

The CPI is “really a measure of inflation” or “price changes in the economy” and it is based on a representative basket of goods and services for Australian households, head of price statistics at the ABS, Rachael McCririck, said.

The CPI provides a “sense of the underlying price pressures in the economy” but isn’t a good measure for how the cost of living crisis is impacting individual households.

“The CPI is really an aggregate measure that informs policymakers and decision-makers about aggregate trends, it informs things like monetary and fiscal policy settings,” she said.

“When we talk about the cost of living, we’re really talking about an individual household and what pressures they’re facing in their day-to-day lives — so to get a sense of that you have to look at the individual consumption basket.”

To calculate the CPI, the ABS collects prices for items grouped into 87 categories and 11 groups. Every month, the ABS calculates the price changes of each item from the previous month and aggregates them to work out the inflation rate for the basket.

Prices are collected from a variety of retailers across the eight capital cities and the ABS uses methods like web-scraping and online and telephone interviews with retailers.

A knitter and an EV owner, McCririck said her basket would differ from the “average household’s basket”.

“But the weights that we give to the basket for the CPI are based on the average household experience,” she said.

How are CPI items and weights chosen?

In deciding which goods and services to include in the CPI basket and what their weights should be, the ABS uses data about how much – and on what – households in Australia spend their income.

If households spend more of their income on one item, that item will have a larger weight in the CPI.

McCririck said reweights are based on the ABS’ household expenditure survey.

“We’ve grown forward the CPI weights by looking … at how trends in the household expenditure change — we’ve grown the weight forward each year manually,” she said.

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Looking at the reweight in 2025, the weight for alcohol and tobacco fell because sales of legal tobacco had fallen as smoking rates decline, although it did not include vapes and illicit tobacco.

The weight for housing also fell because home buying declined amid a shortage in new construction and supply. Dwelling commencements in 2024 were the lowest in over ten years.

In 2024, school fees rose in 2024 and there were more non-government school enrolments forcing the weight for education to go up for 2025.

Due to the rise in airfares, Australian household spending on overseas holidays rose so the weight for international holiday travel and accommodation increased.

Inflationary pressures are ‘going to persist’

Regardless of the weights, Asher told SBS News that rising inflation is a trend that is likely to continue.

“The wars will continue, which means that fuel prices will continue to be high and that has a flow-on effect on goods, logistics and transport systems — which flows onto anything that’s imported,” she said.

“Many materials, even if they are locally produced here, will increase.”

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She said inflationary pressures have seen Australians reduce their spending — a habit she hopes can continue into the Christmas period.

“As we move into the Christmas period, people are worse off now than they were at the beginning of the year with inflation — wage growth hasn’t kept up,” Asher said.

“Some people will be inclined to still spend at Christmas because they feel obliged to do so. I really think that people should be okay to pull back and not overdo it or put things on credit.

“As we move into next year, it’s still going to be incredibly tough. Many of the challenges we’re seeing are going to persist.”

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