The impact of inflation could be worse than the numbers suggest

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Many believe that inflation in South Africa is higher than official figures indicate.

Past debates between skeptics and statisticians at Statistics SA (Stats SA) have been entertaining, with official bean counters proving the calculations correct and commentators scoring points with their arguments.

The latest inflation figure – showing it rose to 4.9% in August from 4.6% in July – is correct, even against the backdrop of much higher price increases in some categories.

Fuel prices, for example, have increased by almost 20% compared to August 2020, electricity by 16% and meat by 10%.

In this rare case, both sides of the argument are correct.

All things are relative

The rate of inflation depends on the products people buy, whether as individuals or households, or as a company, which Stats SA is mandated to measure.

Those who eat meat will have seen their grocery bill increase much more than that of their vegetarian neighbors.

Over the past year, the 10% increase in the price of meat and 21% in the price of oil for frying meat has far exceeded the 5.6% increase in the price of vegetables and 3.5% of the prices of bread and cereals.

In addition, the price of fruit fell 2.2%, according to Stats SA.

The weights assigned to the different products in the inflation basket are important, and the official “shopping list” is very interesting to read.

Fuel price

Fuel again provides a prime example.

“Gasoline prices hit all-time highs in August 2021, with the price of 95-octane domestic gasoline, for example, hitting R18.30 per liter,” says Stats SA, adding that prices fuel consumption rose 4.9% between July and August alone. .

However, the Consumer Price Index (CPI) report from Stats SA shows that the 19.6% year-over-year (until August 2021) increase in fuel prices has increased. is reflected in a 9.9% increase in overall transport costs, taking into account the much smaller increases in other operating costs (4.9%), the cost of purchasing vehicles (5.3%) and public transport (5.3%).

In addition, the weight of fuel in the overall basket of goods and services used to calculate the CPI and the inflation rate seems low at less than 4.6%, greatly reducing the impact of the continued sharp increase in prices of the fuel.

Assuming a household budget of R20,000 per month, Stats SA’s shopping list assumes that the average family spends R916 on fuel each month.

Households’ inflation rate would be different if they drive more or less than experts in Pretoria think.

Most workers probably think they are spending more than the average percentage on fuel.

Read: Zimbabwe predicts inflation of up to 53% by year-end: Sunday Mail

According to the weights of Stats SA, people would spend in total about 14.3% of their total expenses on transport, including the purchase of their cars and motorcycles. A weight of 6.1% was attributed to the purchase cost of the vehicles, equal to 1,220 rand per month within a budget of 20,000 rand.

This would not equal the full down payment on a vehicle, as interest is taken into account elsewhere.

Despite the apparently low weight of transport in the index, transport costs were the main driver of inflation in August, as well as in previous months.

Stats SA notes that of the 4.9% increase in the CPI, rising transportation costs contributed 1.4%.

The same argument applies to electricity, which is now 13.9% more expensive than a year ago. Stats SA weights assume that the 20,000 Rand household will spend 760 Rand on electricity per month.

Food

The second biggest contributor to inflation in August was rising food prices.

This was 1.2% of the 4.9% inflation rate, largely due to rising meat prices. Meat is an important component of the CPI, weighing just under 5.5%. With a fish weighting of 0.4%, it pushes the total expenditure on meat and fish to almost 5.9%.

To contemplate that a typical household spends so much of its budget on meat and fish results in the imaginary household buying 180 rand worth of meat and fish each month.

The total food category has a weight of almost 15.5% in the index, which assumes that the family spends a total of R100 on food.

The category of non-alcoholic drinks (including hot and cold drinks) weighs 1.8% and alcohol is said to occupy almost 1.8% of people’s budget.

Insurance products (10%) and rents (owners’ equivalent rent at 13%) are also prominent in the index, while vacation packages and cheaper telecommunications equipment have reduced their impact on the rental rate. inflation to next to nothing.

New basket

Stats SA notes in its IPC report that it will make changes to the weights next year.

“The CPI weights will be updated with effect from the January 2022 release to be released in February 2022,” according to the report. The weights were last adjusted in January 2017.

Changes in consumer behavior and spending patterns require regular changes in the basket of goods and services to ensure that inflation figures remain relevant.

“International standards require that CPI weights, which reflect proportions of consumer spending, be updated at least every five years,” says Stats SA, adding that these proportions are usually derived from a detailed survey. on household spending.

“Unfortunately, due to funding constraints, Stats SA has not been able to conduct its income and expenditure survey for the past six years,” laments the statistical service.

It indicates that in situations where recent data on household spending is not available, international guidelines allow the use of alternative data sources to adjust weights to account for changes in consumer spending.

Stats SA decided to use the detail of the household final consumption expenditure component of the national accounts from 2017 to 2019 to update the CPI weights.

Additional data sources – such as some Stats SA surveys, administrative records and information on company sales – will complement the national accounts estimates, he says.

“When new data is not available at the detailed product level or at the geographic level, the existing proportions will be kept, with adjustments being made at the level of higher-level aggregates,” the report said.

“In product categories for which sufficiently detailed data are available, changes to the CPI basket will be taken into account.

Collection of stats to go high-tech

He also noted that Stats SA is entering the modern era.

“Price information for product categories typically purchased at retail outlets is currently collected by Stats SA field teams using paper forms.

“From the first quarter of 2022, paper forms will be replaced by tablets. The prices will be collected using a personalized application, which includes quality control and management modules, ”states the announcement from Stats SA.

The new collection method is expected to improve the quality and timeliness of data collection, as well as data processing.

Another important change on the horizon is the method of calculating inflation rates for different regions, or for rural and urban areas.

Due to Covid-19 health protocols, retail prices recorded in all regions (including online prices) have been aggregated to create national average price changes, which will be applied to each elementary index at the regional level.

“This means that changes in the geographic index (including the total country) will vary, on the whole, based on different weights and not on different price changes.”

Rising inflation

The report notes that August was the fourth month in a row that the annual percentage increase is above the midpoint (4.5%) of the monetary policy target range of the Reserve Bank of South Africa (Sarb) inclusive. between 3% and 6%, raising the specter of interest. rate hikes.

Read: The governor of Sarb pleads in favor of an inflation “point target”

Sanisha Packirisamy, economist at Momentum, said that while the Reserve Bank’s monetary policy committee decided to keep the repurchase rate at the current low of 3.5% at its recent meeting, it also upped its forecast. headline inflation at 4.4% for 2021 (previously 4.3%.

To read: the repo rate remains at 3.5% as expected

“Sarb continues to consider risks to longer-term upward inflation trajectory given the threat of higher administered prices [including electricity tariffs], higher national import tariffs and increasing wage requirements ”, explains Packirisamy.

“Although the inflation outlook does not suggest any immediate pressure to hike interest rates imminently, an output gap narrowing more rapidly, real interest rates still negative and inflation risks biased at the bottom. increases justify the need for a constant normalization of interest rates. ”

Momentum expects the first interest rate hike to occur in the first quarter of 2022, but “with risks skewed in favor of an earlier move in November 2021”.

“The pace of interest rate hikes should be gradual thereafter, with two more hikes of 25 basis points each scheduled for 2022 and up to three hikes of 25 basis points each for 2023,” Packirisamy said.

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