Consumer Price Index is the ABS' way of trying to track the "cost of living".
Each year, the ABS will go about collecting a 'basket of goods and services' that reflects the average consumer's purchases.
The contents of the basket can change from year to year - for instance, in the 1960s mobile phones weren't in the basket, but they are now in 2010.
When the CPI rises, this indicates that the cost of living has increased.
An increase in the cost of living means that the price of the basket is more expensive than it was last year.
This is done, as Revel said, by factoring in the importance/reliance people have on everyday essentials compared to luxury goods. Many other factors are also taken into account - for instance, if the price of computers goes up by $1000, but computer now have double the memory capacity and three times the speed of old computers, the ABS will do its best to discern how much of the price increase is due to the increase in the cost of living, and how much of it is for the improvement in the performance and functionality of the computer. Similarly, if the price of a packet of sultanas increases by $2, but that packet of sultanas now contains 120g instead of 100g, the ABS will go about accounting for this. They also go about factoring in the price difference between the brands of a particular good - such as the price of a Heinz can of baked beans and a Homebrand can of baked beans. You get the idea - they do a whole heap of this evil voodoo shit before they spit out the final figures.