With Australians well and truly in the midst of the silly spending season – a whirlwind of sales and overflowing shopping bags – many feel that prices are climbing far faster than the official inflation figures suggest. You only need to stroll through the supermarket aisle to feel the real-world bite of rising costs.

Data shows households are feeling cost-of-living pressures more acutely this year than in past Christmas periods, prompting many to shift their spending earlier in the year to take advantage of sales. Despite this, however, the Consumer Price Index (CPI), Australia’s headline measure of inflation, often paints a more subdued picture.

Why is there such a gap between lived experience and what the official data shows? And is how we measure inflation still up to the task? To find out, BusinessThink spoke with a leading expert on price indexes and productivity measurement: Professor Kevin Fox from the School of Economics at UNSW Business School. His insights reveal why inflation feels more personal, how the CPI has modernised, and why Christmas should never catch policymakers off guard.

Cost of living and the CPI: What’s the difference?

Inflation refers to the overall rise in prices across the economy, and the CPI is the most widely used index for measuring price changes based on a defined basket of goods and services, as explained by Prof. Fox. It is often treated as an indicator of changes in the real cost of living, but in fact, it measures only the cost of that specific basket. Moreover, not all types of spending are included, and the basket does not reflect the consumption pattern of any particular individual or household.

While headline CPI inflation has eased from its peak, recent ABS Selected Living Cost Indexes show that many household groups – particularly mortgage holders and working families – continue to face rising out-of-pocket expenses, with living costs in several categories increasing at rates similar to or higher than the CPI.

More than 25 years ago, the CPI actually tracked the cost of living more closely because it included major household expenses such as mortgage interest payments, which, in the late 1990s, accounted for around $5 of every $100 spent by wage earners.

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Then, in September 1998, following the Reserve Bank's introduction of inflation targeting, the ABS removed mortgage and other interest charges from the CPI, noting that this change would make it less accurate as a measure of living costs. The ABS still flags this limitation today, stating on its website that the CPI is not the ideal measure for assessing changes in the purchasing power of household disposable incomes.

While many Australians believe prices are rising more quickly than the CPI indicates, it’s important to remember that the CPI was never designed to reflect any single household’s situation. “The CPI does not represent the inflationary experience of any one individual. It is a measure of overall price movements in Australia,” says Prof. Fox.

Every household has its own unique spending patterns. Someone who spends a large share of their budget on rent, petrol or groceries might experience noticeably higher cost increases than someone whose spending is concentrated elsewhere. This creates a natural gap between personal experience and an economy-wide measure.

Prof. Fox says Australians who feel overlooked by the CPI have other tools available to them. “If you think that the CPI misrepresents your experience of inflation, it might be worth looking at other inflation measures published by the ABS: Selected Living Cost Indexes. These are for different household types (e.g. self-funded retiree). They take into account different spending patterns by different households, and they include mortgage interest charges, which are excluded from the CPI (to avoid interest rate rises leading to higher inflation measurement, leading to interest rate rises),” he says.

These alternative indexes can reveal sharper inflationary experiences for groups such as mortgage holders, who feel the direct impact of interest rate increases, even though those costs are deliberately excluded from the CPI.

Does CPI account for seasonal shifts in spending habits?

Christmas brings well-known and predictable price jumps. Airfares, accommodation and certain festive foods often rise in price as demand surges. But this does not mean the CPI overlooks these effects. According to Prof. Fox: “The CPI will capture holiday-related seasonal price changes.” However, because these fluctuations repeat at the same time each year, the way the CPI is reported helps avoid misinterpretation. 

Prof. Fox says: “Seasonality is one of the reasons that the CPI is often reported in the media as the year-on-year percentage changes; e.g. the September level of the index compared to the September level from the previous year.” This comparison strips out predictable seasonal effects, allowing analysts to see the underlying momentum of inflation.

Learn more: Inflation is easing: what impact will this have on Australians?

The ABS also adjusts the CPI to further smooth out seasonality. “The ABS produces seasonally adjusted estimates of the CPI, where statistical techniques are used to adjust for seasonal effects,” Prof. Fox says. In other words, the CPI both captures and accounts for Christmas price spikes, ensuring policymakers are not misled by predictable surges in demand.

Improving inflation measures for a changing economy

Despite intense public debate about cost-of-living pressures, Prof. Fox says he is confident about the relevance of current inflation measures. “The CPI is very much still fit for purpose,” he says.

Far from being static, the CPI has undergone substantial evolution in recent years. A major shift has been the use of detailed electronic data rather than traditional in-store price collection. “The CPI has evolved, with new methodology being introduced, as new data sources (e.g. supermarket scanner data) have become available,” Prof. Fox says.

This shift enables more accurate and more frequent inflation reporting: “The ability to source data electronically, rather than through manual ‘field collections’, has enabled the ABS to move to a full monthly CPI starting from October this year.”

CPI groups, contribution to annual CPI movement (percentage points)

Given the many roles inflation plays – from wage negotiations to pension indexation – having multiple measures is essential. “Of course, the headline CPI is just one number, and there are many uses to which inflation measures are put (e.g. indexation of welfare payments, wage negotiations, escalation of business contracts). Hence, the ABS has developed complementary indicators, such as the Selected Living Cost Indexes, to address the demand for alternative indicators that reflect different inflationary experiences,” Prof. Fox says.

These complementary measures help policymakers better understand how inflation burdens fall differently across the population. And yet, Prof. Fox highlights what he considers the most significant recent breakthrough in inflation measurement. “I believe that the most important recent advance in inflation measurement has been the adoption of multilateral index number techniques to incorporate transaction-level data (e.g. supermarket scanner data) into the CPI,” he says.

This innovation has been adopted internationally. “This new methodology has been implemented in multiple countries (Australia, Netherlands, New Zealand, Belgium, Norway, Luxembourg and Austria). Countries continue to adopt this methodology,” he says.

The research continues to influence global statistical practice. “Based on recent research and advice, the UK Office for National Statistics changed its plans and will adopt the recommended CPI methodology from 2026,” says Prof. Fox.

Learn more: What’s inflation – and how exactly do we measure it?

This work emerged from a successful collaboration at UNSW Sydney. “The research behind this innovation happened at UNSW, funded by two Australian Research Council Linkage Grants, with the ABS and Statistics Netherlands as industry partners, and published in this seminal paper. I believe it is a good example of positive societal impact arising from a collaboration between academics and government agencies, supported by public research funding,” says Prof. Fox.

For policymakers interpreting inflation data during high-spending periods, Prof. Fox reassures us that since these shifts in spending happen every year, “there should be no surprises for policymakers.”

Seasonal spending pressures are largely predictable and already built into the tools used to track inflation. The real challenge lies in understanding broader economic trends and the various ways Australians experience rising prices and are forced to adjust their spending as a result.