Last week the official inflation figures for June were released and according to Statistics South Africa (Stats SA), the average inflation rate, or Consumer Price Index (CPI), was 5.1% year-on-year.
This means that, on average, prices increased by 5.1% compared to a year ago. But the word “average” hides lots of different numbers and depending on what your household spends money on, your household inflation rate may feel very different.
The CPI figure is based on a basket of goods and services which is measured each month for price changes.
These baskets are updated every five years when Stats SA asks groups of consumers in different income segments to fill out a diary for a period of time of what they are spending their money on.
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This gives Stats SA an idea of what consumers are buying, and this becomes the average basket of goods and services in South Africa.
They convert the prices attached to each of those items into an index.
When you look at the change in the index between different years or different months, you can calculate the inflation rate.
While Stats SA has an inflation rate for each income category, when it comes to publishing the official CPI figure, it uses an average, and no household is average.
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As Sanisha Packirisamy, an economist at Momentum Investments explains, it is worth remembering that the CPI is simply a statistical estimate on which to measure the price movement of goods and services.
There are various reasons why it would not necessarily reflect your own experiences.
Income disparity: “You’ve got a very wide disparity on race, gender, income levels, rural versus urbanisation. And all these things do have a big influence on the pricing experience, that different people encounter day to day,” explains Packirisamy who says that about 48% of CPI is derived from the highest measured expenditure group, or decile, given that spending in the economy is largely driven by higher-income earners in South Africa due to high income inequality.
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This means those in other (lower) income groups represent a much smaller percentage of total consumption spending in the economy and a lower share of the average basket.
Lower income earners spend a larger portion of their income on necessities like food.
Even though food and non-alcoholic beverages are 17% of the total basket, on average, a low income earner will be spending closer to 45% of their income on food.
Higher income earners are likely to be spending less than 17% of their income on food.
Packirisamy says it is the same experience with transport costs, because as you get into higher income brackets, consumers spend more on cars and petrol, whereas lower income earners would predominantly be spending on public transport.
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Goods vs services: In South Africa our basket is equally split between goods and services. Packirisamy says when you look at the highly developed markets like the US, UK or parts of Europe, they tend to have a bigger portion of their basket concentrated in services.
Food and transport measures, like petrol, would fall into your goods portion of the basket.
Services would be made up of insurance costs, rental inflation and personal care costs, for example. Higher earners tend to spend more on services while lower income earners spend more on goods.
Therefore, when food prices increased significantly, lower income earners were experiencing a higher inflation rate than higher income earners.
However, now that food inflation is moderating and service costs are expected to increase on things like medical schemes and insurance, the higher earner will experience a higher inflation rate.
Increased value:
The inflation metrics don’t always consider the improved quality of the goods and services that you buy.
This is especially true with some forms of technology. The new computer you buy this year may cost more, but it has a lot more functionality.
“The price of that device has gone up, but you’re also getting more benefit from that device and that’s not really accurately captured in a CPI measure,” explains Packirisamy
Perceived inflation: We notice the price changes of items we buy more frequently. The CPI basket will include things like cars or electronics. However, these are not items we buy every day. We would probably buy them once every five years.
We are more likely to experience the change in prices of things we do every day like buying groceries, paying for transport or fuel or going to the doctor.
It may be that the prices of cars and electronics has not gone up as much as food and fuel. This could keep the inflation rate lower than our day-to-day experience of inflation.
Accommodation calculations:
In calculating the cost of housing, Stats SA uses rental inflation and something called the owner’s equivalent rent.
This is a calculation based on the rental a homeowner could receive if they rented out their home. It is not based on house prices or bond rates.
Currently the basket has a 13% weighting for owner’s equivalent rent. This again is an average – there are many households paying significantly more of their monthly income on rent.
It also does not take into account the increase in mortgage costs as CPI does not reflect interest rate changes.
A homeowner who has seen a 30% to 40% increase in their home loan repayment would be experiencing a far higher living cost squeeze than the 3% increase in the owner’s equivalent rent.
In conclusion, while CPI is a useful measure to understand the average movement in prices which is needed for global comparisons and to set monetary policy, it is not particularly helpful for households who are trying to make ends meet.
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