WORDS ON WEALTH: Your personal inflation rate may be higher than CPI

While expenditure profiles differ between rich and poor, they also differ between young and old.

While expenditure profiles differ between rich and poor, they also differ between young and old.

Published Apr 30, 2023


When financial experts talk about inflation, they normally refer to CPI inflation – that is, the year-on-year increase (or decrease, when it’s deflation) in the Consumer Price Index. The index measures the costs of goods and services for consumers, and it is determined monthly by Statistics SA according to a methodology that is widely used by countries around the world to track their inflation rates.

It’s worth exploring, because, as we shall see, the CPI rate, which forms the basis of many economic and financial calculations and is a major factor in the SA Reserve Bank’s interest rate decisions, may not be the best figure to rely on when it comes to your personal financial decisions.

According to Stats SA’s publication, “CPI Sources and Methods”, available on its website, researchers collect retail price data across the country. This data is slotted into various categories in a representative “basket” of consumer goods and services. Each category of goods or services has a “weight” in the basket – in other words, the categories make up different percentages of the index, determined through periodic surveys of household expenditure.

Currently, the weights of the top four categories in the index are:

* Housing and utilities (rent or mortgage payments, maintenance, electricity and water): 24.49%.

* Food and non-alcoholic beverages: 17.14%.

* Transport (car repayments, fuel, vehicle maintenance, public transport): 14.35%.

* Miscellaneous goods and services: 14.81% This category somewhat bizarrely combines personal care (2.1%) with insurance (9.89%) and financial services (1.53%)..

Further down the list are alcoholic beverages and tobacco (6.26%); recreation and culture, including holidays, entertainment and sport (5.20%); household contents and services, including furniture, appliances and domestic worker wages (4.37%); clothing and footwear (3.65%); restaurants and hotels (3.25%); education (2.62%); telecommunications (2.42%); and health, coming in at just 1.44%.

How do you compare?

So do the weights match your expenditure? They certainly don’t match mine. In fact, the weights don’t match the expenditure of the average South African, as explained in the Stats SA publication: “There are two types of weighting for the construction of an aggregated price index for a population on the basis of household expenditure survey results. These are called plutocratic and democratic.

“Plutocratic weights reflect total expenditures of all reference households and the composition of the estimated aggregate values of the reference population. In this type of weighting, each household contributes to the weight an amount proportional to its expenditure. This is the method used to calculate the CPI weights.

“Democratic weighting gives equal importance to all households by averaging consumption value proportions over the whole population instead of summing (up) consumption values. Democratic weights reflect the expenditure of an average household.”

In some respects, the plutocratic weighting reflects the expenditure of high earners: about 25% on accommodation, 17% on food, 14% on cars and 10% on insurance. But only 2.6% for education and only 1.4% for medical expenses? Expensive private education for their children and private health care (read comprehensive medical aid cover) feature high on the priorities of high-net-worth individuals.

On the other hand, the poor spend a great deal on food, transport and accommodation, but rely heavily on the state for education and health care.

While expenditure profiles differ between rich and poor, they also differ between young and old. Young people are likely to allocate a relatively large percentage of their expenditure to accommodation, but being generally healthy, spend relatively little on health care. For retirees, the situation is likely to be the reverse. Health-care expenses rocket in retirement, but accommodation expenses may be relatively low (if mortgage bonds have been paid off), as are transportation expenses, as they are not travelling to and from work each day.

Inflation to the end of March

Each of the CPI categories has its own inflation rate but together, and weighted as outlined above, we get headline CPI inflation, which in March was 7.1% year-on-year, as recently reported by Stats SA.

Here are some of the category rates:

* Food inflation (excluding alcoholic beverages) for March, year-on-year, was 14%, double the CPI rate. So if your expenditure on food was more than 25% of your total expenditure, this would push up your overall personal inflation rate. It also depends on what foods you consume: the highest increases to the end of March were vegetables, breads and cereals (up just over 20% year-on-year).

* Transport inflation was 8.9%, driven largely by increases in fuel prices.

* Shoes and clothing, on the other hand, have seen relatively low inflation of 2.5% to 3%.

* Electricity is lumped together with “other fuels”, which came in at 8.2%. (Last year, Eskom raised its rates by 8.9%. This year the rise is set to double that.)

Looking at these different rates, you can perhaps get a more realistic idea of your personal inflation rate, which may be higher than the CPI figure.