Australia’s consumer price index measures the changes in costs of average goods to most households. If the CPI rises, then wages and pensions need to rise so people have the same amount of money, in real terms, to spend on everyday items. That’s the simple explanation. A longer one is provided by the Australian Bureau of Statistics:
The Consumer Price Index (CPI) is a measure of changes, over time, in retail prices of a constant basket of goods and services representative of consumption expenditure by resident households in Australian metropolitan areas.
The simplest way of thinking about the CPI is to imagine a basket of goods and services comprising items typically acquired by Australian households. As prices vary, the total price of this basket will also vary. The CPI is simply a measure of the changes in the price of this basket as the prices of items in it change.
For practical reasons, the CPI basket cannot include every item bought by households, but it does include all the important kinds of items. It is not necessary to include every item that people buy since many related items are subject to similar price changes. The idea is to select representative items so that the index reflects price changes for a much wider range of goods and services than is actually priced.
The total basket is divided into a number of major commodity groups, subgroups and expenditure classes. It covers items such as food, alcohol and tobacco, clothing and footwear, housing, household contents and services, health, transportation, communication, recreation, education and financial and insurance services.
Got it? Good. The CPI measures increases. It does not provide a justification for further increases.
In the case of items like insurance and rent, it is obvious why they will go up in line with CPI increases – the providers need to cover higher costs. Rent is someone’s income as much as it is someone else’s expense while your insurance will need to keep pace with the value of the items being insured. But I cannot work out why CPI increases are used to justify government charges like train fares, etc. See this quote from the Sydney Morning Herald:
there has been no real increase in CityRail fares since 2010. The former government effectively froze fares in its last year in office, while the current government lifted 2012 rail fares only enough to offset consumer price index changes since 2010.
Wouldn’t further increasing charges to keep pace with CPI just keep pushing the CPI up?
There is a cynical explanation – cost saving. But most government charges are percentage or bracket based anyway, so they get increases through payroll and income taxation, GST, etc. If someone has a non-cynical explanation for how such increases can be justified on the basis of CPI increases, I’d love to hear it.