18 June 2012

The 6% inflation myth

If there's a single consumer out there who really thinks the inflation rate is 6%, please contact Susan Erasmus. She'd like to know where you shop.


If there's a single consumer out there who really thinks the inflation rate is 6%, please contact Susan Erasmus. She'd like to know where you shop.

Year after year the official inflation rate is announced to be somewhere in the region of 6%. Where do they get this from? Have they been in the shops or at the petrol station lately? The scary thing is that based on this, many employers calculate increases for their employees (if they're lucky to get anything at all).

I know, I know – with our draconian labour laws and low productivity levels it is expensive to employ people, and businesses are under huge pressure. In fact, they're going under at an alarming rate and many business owners are feeling the heat on a personal level.

But can employees in all seriousness be expected not to be miffed, if 6% is deemed sufficient for them, but the bosses who make that decision vote in much more for themselves? Anyway, 6% on a salary of R50 000 translates into an increase of R3000 – on a salary of R10000 it's only R600. So the gap only grows. It's only human to be outraged, especially if you're struggling.

Currently, wage talks have stalled between the government and public service unions: the government is offering 6,5% and the unions are demanding 8%.

6% vs. the cost of living

But for the normal consumer and/or salary earner, there seems to be little consolation in a 6% increase, as it doesn't appear to even scratch the surface of the astonishing increases in the cost of living. In fact, salaried people watch how their income dwindles year on year in the vicious onslaught of food, petrol and electricity price rises.

As the buying power of our money decreases, the gap between what we experience as the real inflation rate and what it is supposed to be grows bigger and bigger every year. Because if we get even 3% behind in real terms every year, that is compounded over time. Ten years down the line we're not 30% behind, but much more.

Now is the time to say that I am no economist, and even though the topic interests me and I have done a fair amount of reading on it, I do not even have Economics 101 behind my name. I am, however, a consumer and like 50 million other people in this country, I am expected to balance a budget, save for a rainy day, pay my bills, fund my medical care and make provision for my own retirement. (Did I forget to mention pay taxes and VAT and petrol levies?) Stats are of very little comfort if you run out of money 10 days before the end of the month.


How is inflation calculated?

Many people wonder how the inflation rate is calculated. OK, this is complicated, but let's give it a quick whirl with the help of the Reserve Bank's website:

To measure inflation, one needs some yardstick of the general level of prices in the economy. The most popular such yardstick is the consumer price index (CPI), which is an index of the prices of a representative “basket” of consumer goods and services. The CPI thus represents the cost of the “shopping basket” of goods and services of a typical or average South African household.

The total South African CPI basket consists of about 1 500 different consumer goods and services which are classified into more than 40 groups and subgroups, for which separate indices are constructed. Additional CPIs are also published each month for five expenditure groups, for pensioners, for the nine provinces and for the 14 main urban areas in South Africa.

And it's these 1500 consumer goods and services where I think things go horribly wrong. How many households in SA regularly buy such a variety of goods? How often do you buy a TV or a washing machine, or call a plumber? But food and transport and electricity are everyday things.

Few people in SA can afford luxury goods or services, so the only real profits to be made are now on essentials. That's where the tragedy comes in.

In a country with an alleged 40% unemployment rate and many millions of low-wage earners, there are millions of households surviving on the absolute bare minimum. What little money these households have is spent on food, electricity, travel, clothing and shelter. Very little else.

The inflation rate on the first three of these things is nowhere near 6% per annum.

Food, electricity and fuel increases

In fact, according to Eskom, between 2008 and 2011 real electricity prices rose by 78%.

And food?  According to the South African quarterly “Food Price Monitor” report, produced by the National Agricultural Marketing Council, the wealthiest South Africans spend only 2,9% of their income on food. The percentage for the  poor, by contrast, by October 2011, was 36,4%.

The price of white maize (a staple food in SA) rose between January and October 2011 by 73,57%.  Food inflation was standing on 10,6% for the first 11 months of 2011.  Nowhere near 6%. We dream of 6%.

The price of petrol fluctuates wildly and huge increases are given as the reason for driving inflation. But when the price comes down, as happened a few weeks ago, no prices are reduced. They just go into a holding pattern waiting for the next increase. In June 2010 we paid R8,21 per litre for lead-replacement fuel. Now it's R11,32. Again way more than 6%.

I know that many of these prices are regulated by international trends. But when I am confronted by the fact that food in London supermarkets is cheaper than in South Africa, I can't help but feel that we are being taken for a massive ride. Who by? The government, big business, small business? Everyone?

Generally we South Africans fall into the sitting-duck category of consumer behaviour. We grumble, we moan, we write a few nasty comments on online comment boxes – and then we take the pain and we pay. And cut our budgets accordingly.

Big business and the state both know this, and are quite happy to abuse this horribly. The first real resistance on a financial issue concerned the proposed Gauteng toll roads. And even that was mostly organised by Cosatu, veteran strike organisers.

I look around me and I honestly don't know how people – both employed and unemployed - make ends meet, especially if they have families to support. And, once again, the poor and wage earners bear the brunt of astronomical increases.

The next person who tells me the inflation rate is 6%, gets to stay in a shack in winter for a month with the equivalent of a state old age pension. I say put your money where your mouth is.

(Susan Erasmus, Health24, June 2012)



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