MPC Schools challenge – the latest on inflation Reply

The April CPI inflation numbers are out and they provide some interesting info for participants in the MPC School challenge. The year-on-year rate is slightly up to 6.1%. The key drivers seem to be food and non-alcoholic beverages (8.7%), transport (6.9%) – with petrol at 20% – as well as electricity (17.1%) and water and other services including assessment rates (9.2%). These increases may make the case for keeping the repo unchanged. If these inflation rates set consumers’ inflation expectations and wage demands, any arguments in favour of a rate cut will have to present some convincing forecasts of lower inflation for these categories.

In a nice blog post John Loos explains that increases in the prices of items that are high-frequency purchases, such as food and fuel, add to consumer skepticism about the “low” level of CPI inflation. If you were renting a house and buying a new car, you would have benefitted from the small increases in the prices of these items! If you were buying food and putting fuel in your car, the opposite is true. Unfortunately the nature of current inflation is such  that it is the lower-income groups that experience higher levels of inflation.

There may be more to this story of consumers’ experience of inflation and inflation expectations than just the calculation of averages or a lack of understanding of how the CPI is put together. The cover story of this week’s Financial Mail reports that new weights will be attached to the goods and services in the CPI basket in January 2013. The weights represent the portion of the average consumer’s income that is spent on different items – when calculating the inflation rate, an increase in the price of rice cannot be weighed the same as an increase in the price of petrol. The current weights were introduced in 2009, based on the 2005/06 Income and Expenditure Survey. Since then spending patterns may have changed and the weights will be updated using the results of the 2010/11 IES. In the article Claire Bisseker writes:

FM readers can be forgiven for feeling that the official consumer price inflation figure of 6% does not reflect their personal experience. This is partly because the CPI basket is underweight in precisely those items that many South Africans are forced to spend their income on.

…products and services with administered prices — like electricity and municipal rates and services — which most consumers have no choice but to pay, have generally been increasing far in excess of the general rate of inflation.

This same story goes for food. It is expected that the new CPI basket will bias inflation upwards. It is clearly something to keep in mind.

 

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