SA inflation breaches inflation target in March ’07

March 07 inflation in South Africa: CPIX 6.3% year-on-year

Measuring inflation

Measuring inflation is never easy, and while we have had a few high-profile errors by Stats SA in the last few years, the inflation numbers are probably not that bad. I mentioned some of these difficulties in relation to GDP before.

Inflation and Sean Summers

I remember a story about a lady calling Sean Summers and complaining that inflation was much higher than reported. Apparently (and I heard this from him live over radio on moneyweb radio) he took her credit card details (I would probably trust Mr Summers too) and called up her purchases over the previous year. Based on a like-for-like comparison of products, her “actual inflation” was significantly lower than reported inflation.

Why we spend more

Differences in the basket used (which has to be an average by definition) will give different inflation than an individual experiences. However, there are other factors that influence how much money we spend each day. In an economic expansion, we spend more because we buy more goods and services, not only because the price of good has increased. As everybody spends more, and conspicuously spends more, the normal frequency and standard of eating out increases, the types of cars purchased moves upmarket, more food is bought from Woolies and less from Shoprite.
This means consumers have less money left at the end of the month, but it is not necessarily all attributable to inflation. Inflation that an individual experiences may well be higher than reported – and I don’t deny the possibility that the Stats SA numbers are wrong – but until you take a detailed like-for-like analysis of your own standard basket of goods to calculate your own “experienced inflation” I am not convinced by the community comments below the article on moneyweb.

Monetary Policy Committee decision

Also, the interest rate decision will take into account the nature of inflation (food prices, petrol and possibly future electricity increases) rather than only the crude number. External shocks will result in higher inflation regardless of how much we squeeze consumers and business with higher interest rates.
We may or may not see an increase inspite of the breach. Time to wait and see.

Published by David Kirk

The opinions expressed on this site are those of the author and other commenters and are not necessarily those of his employer or any other organisation. David Kirk runs Milliman’s actuarial consulting practice in Africa. He is an actuary and is the creator of New Business Margin on Revenue. He specialises in risk and capital management, regulatory change and insurance strategy . He also has extensive experience in embedded value reporting, insurance-related IFRS and share option valuation.

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