Using Engel Curves to Estimate the Bias in the Australian CPI

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.