The real inflation rate

A perennial point of contention among South Africans is the disjuncture between the  rate of inflation  stated by officials and economists and their lived experience.  Individuals increasingly  suggest that the "real" rate of inflation is substantially higher than what, for example, StatsSA tells us it is. To support their claims individuals  are usually able to cite innumerable examples as to why  their experiences debunk the official  CPI (currently at about 6%).

Economists, in retort,  point that the CPI and other estimates of inflation  are scientifically based and drawn from rigorously collected data and known consumption patterns  A great deal of effort is invested by authorities in collecting prices for a predefined basket of goods that mirrors what is known about consumers consumption patterns and purchasing habits. The inflation rate is derived from objective empirical studies that cannot easily be discounted. Pundits then invariably proceed to point out that mismatches are possible as the consumption patterns are  unique to individuals while the CPI measures the aggregate impact.

They further point out that critics of the official rate cite price increases that are most striking while  they remain silent on those products whose prices are rising slowly or even falling. Cellphone charges and the internet bandwith costs have, for example, plummeted just as demand for these utilities become increasingly important.

However these responses indicate lack of insight -  the (supposedly subjective) experience of the critics are not necessarily incompatible with the (objective) official statistics.

On many items consumers  are confronted with price increases that significantly exceed the inflation rate. In recent months these items have come to include food and fuel. In addition administered prices (i.e. prices that are set by state institutions who do not  face competition for their services)  have also risen far faster than the CPI. Included among the latter are municipal rates, the price of electricity and road tolls. One feature common to these products is that there are few or no substitutes and consumers can do relatively little to circumvent them. To ensure there is food on the table, they are able to get to work and their municipal rates are paid individuals have to bear with these increases and cut costs elsewhere. The only place where costs can be cut are on discretionary items like IT and cellphone costs. It is among the latter category that price increases have been most modest.

In other words consumers are unable to take full advantage of stagnant or declining prices as  their income is absorbed by the rapidly increasing cost of essentials and administered prices.  In the process their cost profile rises and their consumption patterns alter. The basket of goods that they consume changes with prices with an ever increasing proportion of the basket being made up of high inflation essentials.

In the interim the economists are deriving the CPI on a stagnant basket of goods - not one where the 20% increase in the cost of food and petrol and electricity is offset by commensurate reduction in consumption elsewhere. The composition of the basket of goods used in deriving the CPI is only reconsidered ever ten years or so. In reality households have to adjust their consumption patterns every time there are sustained increases in prices and not every ten years or so.

So, dear consumer, you may not be losing your grasp on reality. Your personal rate of inflation may be well into the double digits and it is cold comfort that the price of items you can no longer afford are rising less rapidly. On the other hand I suggest that the official statistics will have ever less relevance to individual consumers.