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The Lowdown on Consumer Price Inflation

We break down the numbers and figure out why CPI feels so much worse than what we’re told.

Hooray! South African consumer price inflation (CPI) is under control. In fact, January 2019 CPI came in at 4% which is towards the bottom of the stated target range of 3% - 6%. This is heralded as great news for consumers. And boy, can we use some good news.

The problem though, is that for some reason, inflation feels high. What’s going on here when it feels like our household budgets are getting squeezed more than ever, yet at the same time we’re told that inflation is at near record lows? We’re having a moment of cognitive dissonance, so we’ve done some digging.

Let’s unpack how CPI is calculated.

Stats SA determines a “basket” of goods and services which South Africans typically consume, and they track the changes in the prices of this basket over time. The makeup of the basket changes from time to time as consumer habits change. For example, two years ago Stats SA dropped blank writable CDs from the basket since people weren’t really buying those any more.

Currently, the basket is made up of about 400 goods and services. These goods and services aren’t equally weighted in the calculation – allowance is made for the fact that we consume more of some things than others.

So if the basket is good, and it’s got a weighting to reflect how we spend, where does the problem lie?

Essentially, the issue lies in the fact that, as consumers, there are things that we have to buy in order to survive, versus things that we typically want to buy ‘cause they’re nice.

Things which we have to buy include the typical basics like electricity, water, transport costs, education, medical care, and food staples. On the other hand, there are things which consumers do buy, but wouldn’t be considered necessities. For example, a new or used car is something which is nice to buy, but something that a consumer can choose not to buy (or delay the purchase). Clothing could also fall into this category, where consumers can often choose to spend less on clothes by delaying purchases or buying new clothes less frequently.  

When we start to look at spending habits with this lens, by and large, it tells a different story. For example, the following items and their inflation are generally considered things which many people have to buy:

  • Electricity:  +7.5%
  • Water:  +10.9%
  • Education:  +6.6%
  • Public Transport:  +9.2%
  • Health Services:  +6.6%
  • Food: + 2.3%

On the other hand, some categories, which we would consider “nice to haves” have experienced incredibly low inflation:

  • Recreation and Culture:  +1.1%
  • Restaurants and Hotels:  +3.8%
  • Telecommunication Equipment:  -11.3%
  • Purchase of Vehicles: +3.7%
  • Household Contents: +3.2%

When Stats SA combines the bundle to view an overall inflation rate, these highs and lows largely cancel each other out, which brings us to a seemingly palatable 4% overall inflation rate.

When times are toughest though, consumers will start to spend less on things they don’t really need (which incidentally have generally low inflation) while maintaining their spend on things they can’t choose to avoid. Unfortunately, the “must have” items tend to make up a much larger proportion of spending in poorer households, so in these cases the poor are experiencing a much higher inflation than anybody else. And we doubt they are particularly comforted by the nice low published inflation rate.

Now more than ever, it’s important that we spend cleverly. One way to do this is by bundling the things you have to buy with things that you should be buying. Take Indie’s Life Insurance, for example: every policy comes with a built-in Wealth Bonus that grows every time you pay your premium. So while you’re protecting your wealth, you’re creating it too.

Yes, wallets are stretched; but necessity breeds innovation. And even though times are tough, there are always ways to turn obstacles into opportunities.

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