Did you know that how you spend your money has an influence on the decisions of some of the country’s top policymakers as much as their decisions influence you? Talk of Consumer Price Index (CPI), inflation, repo rate and the like often makes consumers’ eyes glaze over. But the ripples in the economy have a very real meaning for South Africans having to put food on the table every day.
Statistics South Africa’s recent announcement on how CPI will be measured differently in the next few years is a good example, and agricultural economist Lunathi Hlakanyane unpacks what it means for South African households.
The average shopper in South Africa is not an economist. How do you explain CPI to them?
In a nutshell, the Consumer Price Index is an economic yardstick used to measure the weighted average change in prices of goods and services that consumers – in other words you and I – pay on a month-to-month basis.
In turn, this data is used to estimate the general progressive increase in prices of goods and services in the economy or, quite simply, the inflation rate. Prices across a wide assortment of everyday goods and services such as food, transport and miscellaneous farm utilities are used to calculate the CPI.
How are the regular announcements on CPI useful for our country as a whole?
Think of the CPI as an economic stethoscope. In other words, it is an extremely useful instrument for checking the economy’s pulse at any given time.
For example, the South African Reserve Bank leans heavily on the CPI’s inclination to inform inflationary targets and other monetary policies. On the other hand, a helicopter view of the CPI is quite helpful in guiding households’ budgets by, firstly, increasing awareness of average price changes across essential items and secondly, readjustment of household expenditure patterns to adapt to such changes.
Stats SA announced that “CPI weights” have been adjusted for the first time since 2017. Will the slightly different way of measuring household expenses reflect consumers’ day-to-day reality more accurately?
As a general rule of thumb, items that are either too expensive (luxury vehicles, antique paintings, etc.) or too cheap (single-wrap bubblegum, etc.) are typically omitted from the basket of goods weighted in CPI. The average number of people who consume these are too infinitesimal to have any significant impact on the final reading.
The list of items included in SA’s CPI is reviewed every five years. The main reason for this is that CPI, far from only being reflective of changes in average prices of goods and services, is also reflective of prevailing consumer sentiment.
For example, the latest updated goods and services basket contains 415 items, a notch up from 393 and 404 in 2013 and 2017 respectively. Items such as DVDs and satellite dishes have been disqualified, owing to the drastic decline in their demand over the years, while items such as sound bars and fibre internet are some of the latest entrants, in no small part thanks to the meteoric rise in their popularity over the last five years.
So, in short, yes, the latest measuring methodology is highly reflective of households’ overall demand and expense composition.
Stats SA admitted that a lack of money has limited the amount of data on which it could base its adjustments. It also based its decisions on data from 2019 (to sidestep “abnormal” pandemic circumstances). It sounds like a problem. Is it?
Certainly, the severe under-resourcing of our esteemed national data repository is a cause for serious concern. Nevertheless, I believe the validity of any data lies more in the quality of instruments and methodologies used to collect and analyse it and less on the distance of its baseline.
While it is true that the pandemic resulted in operational challenges for Stats SA, this does not in any shape or form diminish the validity of its time-tested methods.
The organisation continues to occupy the highest echelon in the hierarchy of most statistically efficient data banks in the world.
As an economist, how do you see CPI and inflation changing in the next few months?
Economists are notoriously pessimistic. Some of it is warranted and some, perhaps, not so much. In the case of South Africa, it is incredibly difficult not to be pessimistic about the trajectory of the general cost of living.
As a point of departure, perhaps we should consider the following hard truths:
- The current CPI is 5.9%, the highest rate in almost five years
- Interest rates are steadily rising
- Fuel prices are surging
- Eskom plans to hike electricity prices by 20.5%
- The rate of unemployment is a sobering 35%
Against this backdrop, therefore, it would not be entirely unreasonable to assume that the following months are likely to be characterised by one of the harshest cost-pull inflation periods we have seen in a very long time. In plain English, what I mean is… winter is coming.
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