A discussion amongst us about the increase in the cost of living in restaurants, pubs and braais often ends with words like these, “The published inflation rate is rubbish! Have you seen how the food prices are rocketing?”
In truth, the inflation rate, or more correctly, the annualised increase in the consumer price index (CPI), is one of the most closely scrutinised bits of data to be published, not only by the South African Government, but world-wide. Why is that? Well, the increase in the CPI is embedded in many contracts and other financial and economic tools. Examples are wage agreements, rental contracts, and social grants. In addition, many investment contracts and benefits are linked to the increase in the inflation rate, there are inflation-linked government bonds where the interest paid is clinked to the changes in the inflation rate. Many insurance contracts provide benefits that are escalated annually by the inflation rate. Therefore, it is essential that all the role players in the economy in both the private and public sector are satisfied with the basis of calculation of the inflation rate.
So why do we feel that the inflation figures are ‘wrong’? The short answer is that we tend to look at one component, food prices, and we also look at our own purchases, and that can never reflect the whole inflation rate calculation. In truth there are many ways that the inflation rate can be measured, for example each of us has a personal inflation rate. In fact, if you are bored you can find out your own inflation rate at this link to StatsSA https://apps.statssa.gov.za/cpi_calc/index.aspx .
So how is inflation calculated? StatsSA prepares a list of goods and services consumed by the average consumer in South Africa, this is known as the basket it then allocates a share of the basket to each of these components. Currently the biggest components are Housing and Utilities (24.6% of the basket), Food and Non-Alcoholic beverages (17.2%), Miscellaneous goods and services (14,7%) and Transport (14,3%). The increase of all the components is measured monthly and published in total as the CPI. In January, for example, Stats SA changed the basket of products by adding 71 products, removing 53 and reorganising 29. In the picture you can see that the increase in the CPI for maize was 10,1% while the published inflation rate was 3.2%.
The other factor is that inflation differs by where you live. So, for example the most recent inflation rate (February) for the Eastern Cape is 3.2% with the Western Cape at 3.9% and Gauteng 2.8% all using the same components for calculation.
Finally, the increase in prices for government administered prices vs prices decided by the market can be analysed. The inflation contribution from the prices of fuel, electricity, water supply, and municipal rates is separated out. So, whereas the general inflation rate was 3.2% the rate of increase in government determined prices was 4.2%
Many years ago, Investec spotted what they thought was an error in the CPI calculation and the result was that StatsSA was forced to publish a detailed response, so far from being a thumb suck, inflation may be one of our most accurately measured statistics.