Inflation is a term we hear often, especially when discussing the economy and our personal finances. But have you ever wondered how it's calculated and why it sometimes feels like your expenses are rising faster than the official inflation rate? In our latest podcast episode, I am joined by
Sanisha Packirisamy, Economist at Momentum Investments to help unpack the intricacies of inflation calculation in South Africa, shedding light on some common misconceptions.
One of the key points discussed is the concept of the Consumer Price Index (CPI) basket. This basket represents a range of goods and services that the average household consumes, and its prices are tracked over time to calculate the inflation rate. However, as our guest Sanisha explains, this basket is reweighted every five years to reflect changes in consumer habits. For instance, items like DVD players have been replaced by more relevant products like smartphones and streaming services.
Sanisha also touches on the "owner's equivalent rent," a term that might seem confusing at first. Essentially, it estimates what homeowners would pay if they were renting their own homes. This figure is crucial for calculating housing costs within the CPI basket. Interestingly, due to the soft housing market in recent years, rental inflation has been lower than overall inflation, which affects the average inflation rate.
The episode also explores how different income groups experience inflation differently. Lower-income households spend a larger portion of their income on necessities like food and public transport, making them more sensitive to price increases in these areas. In contrast, higher-income households might spend more on services and luxury goods, which can distort their perception of inflation.
Behavioral biases also play a role. For example, we tend to notice price changes in items we purchase frequently, like groceries and fuel, more than in items we buy less often, like electronics or cars. This can make us feel like inflation is higher than it actually is.
Moreover, the podcast delves into the impact of global events like the Covid-19 pandemic and geopolitical conflicts on inflation. These events can cause sudden spikes in prices for essential goods, further complicating our understanding of inflation.
So why does the official inflation rate often seem out of sync with our personal experiences? The answer lies in the complexity of the CPI basket and the various factors influencing it. By understanding these nuances, we can better grasp why our bills might not always align with the official figures.
Tune into our latest episode to get a comprehensive understanding of how inflation is calculated and why it might not always match your personal experience. Whether you're an economist or just someone trying to make sense of your monthly expenses, this episode offers valuable insights that you won't want to miss.