Inflation impact may be worse than the figures suggest

Many believe South Africa’s inflation is higher than the official figures state.

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

The latest inflation figure – indicating that it increased to 4.9% in August compared with 4.6% in July – is accurate, even against the background of much higher price increases in certain categories.

Fuel prices, for example, increased by nearly 20% compared with August 2020, electricity by 16% and meat by 10%.

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

All things are relative

The inflation rate depends on what products people buy, either as individuals or households, or as a society, which Stats SA is mandated to measure.

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

Over the past year, the 10% increase in the price of meat and 21% increase in the price of oil to fry the meat far outweighed the 5.6% increase in vegetable prices and 3.5% increase in the prices of bread and cereals.

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

The weights allotted to the different products in the inflation basket is important, and the official ‘shopping list’ makes for very interesting reading.

Fuel prices

Fuel again provides an excellent example.

“Petrol prices recorded all-time highs in August 2021, with the price of inland 95-octane petrol, for example, reaching R18.30 per litre,” says Stats SA, adding that fuel prices increased by 4.9% between July and August alone.

However, Stats SA’s Consumer Price Index (CPI) report shows that the 19.6% year-on-year increase (to August 2021) in fuel prices translated into an increase of 9.9% in overall transport costs, when factoring in the much smaller increases in other running costs (4.9%), the purchase cost of 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 inflation rate seems low at less than 4.6% – reducing the impact of the continuing hefty increase in fuel prices significantly.

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

The household’s inflation rate would be different if they drive more, or less, than the experts in Pretoria believe.

Most working people probably think they spend more than the average percentage on fuel.

Read: Zimbabwe sees inflation as high as 53% at year-end: Sunday Mail

According to the Stats SA weights, people would spend a total of around 14.3% of their total spending on transport, including purchasing their cars and motorbikes. A weight of 6.1% has been assigned to the purchase cost of vehicles, equal to R1 220 per month in a budget of R20 000.

This would not equal the total instalment on a vehicle, as interest is brought into consideration elsewhere.

Despite the seemingly 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 transport cost contributed 1.4%.

The same argument is applicable to electricity, which is now 13.9% more expensive than a year ago. Stats SA’s weights assume that the R20 000 household will spend R760 on electricity per month.

Food

The second largest contributor to inflation in August was higher food prices.

This accounted for 1.2% of the 4.9% inflation rate, largely due to the increase in meat prices. Meat is an important component of the CPI, with a weighting of just below 5.5%. With fish at a weighting of 0.4%, it pushes the total spending on meat and fish to nearly 5.9%.

Contemplating that a typical household spends so much of its budget on meat and fish translates to the imaginary household buying R1 180 worth of meat and fish every month.

The total food category has a weighting of close to 15.5% in the index, which presumes that the family spends R3 100 on food in total.

The non-alcoholic beverages category (including hot and cold drinks), has a weighting of 1.8% and alcohol is supposed to take up nearly 1.8% of people’s budgets.

Insurance products (10%) and rent (owners’ equivalent rent at 13%) are also big in the index, while cheaper package holidays and telecommunications equipment have reduced their impact on the inflation rate to just about nothing.

New basket

Stats SA notes in its CPI report that it will be making changes to the weightings next year.

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

Changes in consumer behaviour and spending patterns necessitate regular changes to the basket of goods and services to ensure that the inflation numbers remain relevant.

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

“Regrettably, due to funding constraints, Stats SA has been unable to run its Income and Expenditure Survey in the past six years,” laments the statistical service.

It says in situations where recent household expenditure data is not available, international guidelines permit the use of alternative data sources to adjust the 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 company sales information – will supplement the national accounts estimates, it says.

“Where fresh data is not available at detailed product or geographic level, the existing proportions will be retained, with adjustments being made at higher-level aggregates,” advises the report.

“In product categories where sufficiently detailed data is available, changes to the CPI basket will be considered.

Gathering of stats to go high-tech

It also noted that Stats SA is moving into the modern age.

“Price information for categories of products typically purchased in retail outlets is currently collected by Stats SA fieldwork teams using paper forms.

“Starting in the first quarter of 2022, the paper forms will be replaced by tablets. Prices will be collected using a custom application, which includes quality control and management modules,” says the announcement from Stats SA.

It is expected that the new collection method will improve the quality and speed of data collection, as well as the processing of data.

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

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

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

Rising inflation

The report notes that August was the fourth consecutive month where the annual percentage increase is higher than the midpoint (4.5%) of the South African Reserve Bank’s (Sarb’s) monetary policy target range of between 3% and 6%, raising the spectre of interest rates hikes.

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

“The Sarb continues to view risks to the inflation trajectory to the upside in the longer term, given the upside threat of administered prices [including electricity tariffs], higher domestic import tariffs and escalating wage demands,” says Packirisamy.

“Although the inflation outlook suggests no immediate pressure to hike interest rates imminently, a more rapidly closing output gap, still-negative real interest rates, and inflation risks skewed to the upside substantiate the need for a steady normalisation in interest rates.”

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

“The pace of interest rate increases is likely to be gradual thereafter, with another two hikes of 25 basis points each pencilled in for 2022 and up to three hikes of 25 basis points each for 2023,” says Packirisamy.

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