Investments

16 October 2026

By Damon Frith, Wealth Editor, NAB Private Wealth

Every time you hear that inflation is rising or falling, the number being discussed, referred to as the Consumer price Index (CPI), is usually based on a carefully constructed "basket of goods and services" tracked by the Australian Bureau of Statistics (ABS).

This basket is designed to represent what Australian households actually spend their money on, from groceries and rent to streaming subscriptions and insurance. Each item is given a weighting based on how much households spend on it. 

The basket is updated regularly to reflect changing consumer behaviour. As spending patterns shift, so do the weightings. For example, international travel became less important during COVID-19 with border closures and then regained weight as travel recovered. The ABS has updated these weights annually since 2018 to keep pace with changes in household spending.

Understanding how the basket works helps explain why inflation behaves the way it does, why the Reserve Bank of Australia (RBA) often focuses on "trimmed mean" inflation rather than headline inflation, and why investors should pay close attention to changing weightings.

What is the CPI basket?

How would you go about determining if the cost of living was rising?

You could track the price of milk, but that wouldn't tell you much about housing, electricity or healthcare. You could track hundreds of products, but that would quickly become overwhelming.

Instead, the ABS creates a representative basket containing goods and services that households purchase across the economy. The prices of thousands of individual products are collected and grouped into expenditure categories before being combined into a single measure that forms the CPI.

Think of the CPI basket as a snapshot of the average Australian household's spending habits.

The basket includes broad areas such as:

• Housing
• Food and non-alcoholic beverages
• Transport
• Healthcare
• Recreation
• Education
• Insurance and financial services
• Clothing and footwear
• Household goods and services

The CPI is not intended to match the spending pattern of any single household. Instead, it measures inflation experienced across Australian households as a whole.

Why some items matter more than others

Not every price change affects inflation equally. If the price of a newspaper doubles, most people will notice but household budgets may not be significantly affected. If rents rise by 10%, the impact can be substantial because housing represents one of the largest household expenses.

This is where weightings come in. Every category in the CPI basket receives a weighting that reflects its importance in household spending.

For example:

Category	Example Weight
Housing	22%
Food	17%
Transport	11%
Recreation	9%
Clothing	3%

These figures are illustrative only, but they demonstrate that the larger the household spending share, the greater the influence on inflation. A 10% increase in rents will have a far bigger impact on inflation than a 10% increase in books or magazines because housing absorbs a much larger share of household budgets.

How the basket is updated

Consumer behaviour changes constantly.

Thirty years ago, households spent money on cassette tapes, CD players and film processing. Today they spend money on streaming subscriptions, smartphones and cloud storage.

If the basket never changed, inflation would eventually become a poor representation of reality.

To address this, the ABS updates CPI weights every year using Household Final Consumption Expenditure (HFCE) data and other sources such as supermarket scanner data and retail transactions. Since 2018, annual reweighting help ensure the CPI remains representative of contemporary spending patterns.

In practice, this means:

• Categories where spending is increasing receive higher weights.
• Categories where spending is declining receive lower weights.
• New spending patterns gradually become more important.
• Obsolete spending categories eventually disappear.

The system is designed to ensure inflation reflects modern Australia rather than the economy of a decade ago.

Why housing matters so much

Housing is often one of the largest components of the CPI basket.That's because Australians devote a significant portion of household expenditure to housing-related costs, including:

• Rents
• New dwelling purchases
• Maintenance and repairs
• Utilities

When housing costs accelerate, inflation often becomes more difficult for policymakers to control.

This is one reason why investors may choose to closely monitor housing inflation. Persistent increases can influence consumer spending, wage demands and ultimately interest rate decisions.

The difference between headline and underlying inflation

Not all inflation is created equal.

Sometimes inflation jumps because of temporary factors such as:

• Fuel price spikes
• Weather-related food shortages
• Airfare volatility
• Energy rebates ending

These movements can be meaningful, but they may not represent a persistent inflation trend. For this reason, economists look beyond headline CPI and focus on measures of underlying inflation such as the trimmed mean.

The trimmed mean uses the same CPI basket and the same weightings. However, instead of counting every price movement equally, it removes the most extreme price rises and falls before calculating inflation. That helps answer a critical question about whether prices are rising across most of the economy, or only within a few volatile categories.

Why the basket changes can matter more than inflation itself

Many people focus on whether inflation is 2%, 3% or 4%. However, attention should also be given to what is driving inflation and whether the basket itself is evolving.

We can consider two scenarios:

Scenario 1: Housing Weight Increases

If housing accounts for a larger share of spending over time, rent increases become more influential in future inflation readings. This could mean inflation remains elevated even if other categories are relatively subdued.

Scenario 2: Services Become More Important

As Australia becomes a more service-based economy, categories such as healthcare, insurance and personal services may carry greater importance. Service inflation is often slower to fall than goods inflation. That can make inflation more persistent and keep interest rates higher for longer.

The Key Take Aways for Investors

The CPI basket is far more than a statistical exercise.

It influences:

• Interest rate decisions
• Government policy
• Bond markets
• Share valuations
• Consumer confidence

Most importantly, it provides insight into where households are directing their spending.

For example:

• When basket weights change, they reveal structural trends in the economy.
• Rising housing weights can highlight affordability pressures.
• Growing healthcare weights may reflect an ageing population.
• Increasing insurance weights might indicate higher climate-related risks.

These changes can create opportunities and risks across sectors long before they show up in company earnings.

Investors who focus only on the headline inflation number may miss the bigger story. The composition of the basket can reveal where inflation is likely to be persistent, which industries may benefit from changing spending patterns, and how future RBA policy decisions could unfold.

In that sense, the CPI basket is not simply a measure of inflation. It is one of the most useful windows into how Australians live, spend and adapt to economic change. Understanding its construction can provide valuable clues about the future direction of both the economy and investment markets.

 

To discover more call 1300 683 106 or email us on NAB Private Wealth Investor Desk

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Important information:

The information contained in this article is believed to be reliable as at October 2026 and is intended to be of a general nature only. It has been prepared without taking into account any person’s objectives, financial situation or needs. Before acting on this information, NAB recommends that you consider whether it is appropriate for your circumstances. NAB recommends that you seek independent legal, financial and taxation advice before acting on any information in this article. Any forecasts or views about future events are not guaranteed and may change. Past performance is not a reliable indicator of future performance. The views expressed are those of the author and are current as at the date of publication.

© 2026 National Australia Bank Limited ABN 12 004 044 937 AFSL and Australian Credit Licence 230686. NAB Private Wealth is a division of National Australia Bank Limited.

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