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Blog: 23 April 2016 (Unpacking the CPI)
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In today's blog we take a look at the much quoted (yet often not well understood) figure called the CPI. CPI is a acronym for Consumer Price Index (CPI). This is used as South Africa's official measure of inflation. The aim of the CPI figure is to measure the average rate of inflation experienced by the average South African during a period of time (main measure focuses on year over year movements), for basket of goods and services purchased by the average South African consumer.
The relative importance (weights) of the basket is determined by the Income and Expenditure Survey run by Statistics South Africa. This is large scale household survey in which roughly 30 000 households (which represents South Africa's demographics) are surveyed for a full year in order to measure expenditure and income over a 12 month period. The results are then used in order to determine the weights of all the items in the CPI basket. Interesting to note the reason why provinces experience different rates of inflation is due to the fact that the weights (and items collected in each province's basket of goods and services) are different. For example the weight for fish might be lower in Gauteng than a province that is close to the coast. Statistics South Africa staff collect prices all over the country every month in order to calculate the figure on a monthly basis. This includes visits to chain stores, independent stores etc. Prices are collected in big metropolitan cities, smaller cities and certain more rural areas. The headline figure published in the press and which is used by the South Africa Reserve Bank as the official inflation target is the CPI for All Urban Areas. Basically the basket of goods and services that's collected from all urban areas (large and smaller cities and suburbs). Weights and prices from rural areas are excluded from the headline figure. The main groups for which prices are collected include:
The bar chart below shows the year on year inflation rate of each of the different main groupings for the month ending March 2016 |
From this chart its clear by far the biggest driver of the current inflation rate is Food and Non Alcoholic Beverages with an inflation rate of 9.5%. The March 2016 figure came in lower than economists expected, part of it was due to a technicality, and a big part of due to a drop in petrol prices (in March), which of course will increase substantially in April due to higher levies on fuel as announced in the budget, and stronger oil prices experienced during April.
The technicality is the fact that Tertiary education fees did not increase due to the #feesmustfall campaign. Education inflation as shown by the bar chart above came in at 4.6% And this made made up solely by price increases in primary education. 12 months ago tertiary education prices increased by 9.8%. If tertiary education fees increased by 9.8% this year again (as it did last year this time), the headline inflation figure that came in at 6.3% would actually have been just over 6.4%
We expect CPI to tick up in coming months towards the 7.2% to 7.5% (especially when considering the latest municipal tariff and Eskom price increases). And with the Reserve Bank in a interest rate hiking cycle (to try and curb inflation) consumers are in for a very tough time, rising prices, rising interest rates, rising fuel prices etc.. Buckle down and tighten those belts.
The technicality is the fact that Tertiary education fees did not increase due to the #feesmustfall campaign. Education inflation as shown by the bar chart above came in at 4.6% And this made made up solely by price increases in primary education. 12 months ago tertiary education prices increased by 9.8%. If tertiary education fees increased by 9.8% this year again (as it did last year this time), the headline inflation figure that came in at 6.3% would actually have been just over 6.4%
We expect CPI to tick up in coming months towards the 7.2% to 7.5% (especially when considering the latest municipal tariff and Eskom price increases). And with the Reserve Bank in a interest rate hiking cycle (to try and curb inflation) consumers are in for a very tough time, rising prices, rising interest rates, rising fuel prices etc.. Buckle down and tighten those belts.