Measuring Inflation

This annexure discusses the appropriate source of general inflation forecasts to use in constructing the Public Sector Comparator (PSC)¹ and assessing bids for Partnerships Victoria projects.

The measurement of inflation is a complex issue. It is generally accepted that no single price index can measure all aspects of inflation or meet every user's needs. However, because of the availability of the consumer price index (CPI)², the confidence placed in it, and its high quality, it is now often used as a general measure of inflation. The CPI reflects the changes in the amount the average consumer pays for a fixed basket of goods and services. Inflation, as discussed below, is assumed to reflect movements in the CPI.

The PSC should generally be prepared on a nominal basis and before income tax. The forecast general inflation rates should be obtained from the projections in the State budget papers.

Other commonly used sources for the forecast general inflation rate in Australia include the Reserve Bank target inflation rate, the OECD Economic Outlook forecast and the implied rate taken from fixed coupon and indexed treasury bonds.

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1 The Public Sector Comparator represents the most efficient public procurement cost to achieve required service delivery outcomes.

2 In cash flow modelling, separate inflation indices (escalators) are often used for labour, fixed charges and capital goods. In national accounts, separate deflators and chain price indexes are used for GDP, GNP etc. Historical figures will show differences, but in forecasting, these differences are not usually significantly out beyond a few years.