The Consumer Price Index (CPI) inflation rate is one of the most widely quoted statistics in finance and is used, among a myriad other things, to calculate an investment’s real rate of return (actual return minus inflation). However, because people spend their money on different things, it represents an average rate across the South African population, which may not reflect your lifestyle or spending patterns. Thus, to get a better idea of how well your investments are serving you or how well your income is keeping pace with rising prices, you need to consider the extent to which your “personal inflation rate” may differ from the CPI rate.
The CPI inflation rate is published monthly by Statistics SA. The year-on-year figure, which interests us most, denotes the percentage change in the index over 12 months. For example, the year-on-year figure released by StatsSA for December 2024 was 3.0%. This means the index rose by 3.0% from December 2023 to December 2024.
Along with this so-called “headline” rate, Stats SA publishes the rates of the most important categories of goods and services. The December 2024 year-on-year rate for food and non-alcoholic beverages, for example, was 2.5%. It also publishes what is known as the “core” inflation rate, which omits more volatile food and energy components to better reflect underlying price trends.
How CPI is calculated
According to StatsSA’s publication “CPI Sources and Methods”, available on its website, researchers collect retail price data across the country. This data is slotted into 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.
The weightings of the top four categories in the index, according to StatsSA’s latest CPI-basket report, are:
• Housing and utilities (rent or mortgage payments, electricity and water): 23.4%
• Food and non-alcoholic beverages: 19.9%
• Transport (car repayments, fuel, vehicle maintenance, public transport): 13.6%
• Financial services (insurance and bank charges): 9.6%
Further down the list are restaurants and hotels (5.9%); information and telecommunications (5.4%); alcoholic beverages and tobacco (4.7%); clothing and footwear (4.1%); sport, recreation and culture (2.9%); education (2.2%); and health, coming in at just 1.8%.
The report also gives weightings of urban dwellers arranged by expenditure decile, showing the differences between low spenders and high spenders. The biggest difference is in the percentage of the basket taken up by food: in the poorest 10% of urban households, food accounts for 40.7% of expenses, whereas in the wealthiest 10%, only 11.3% of expenditure is on food.
What are your weightings?
Some of the weightings in the basket seem unrealistic. Only 2.2% for education and only 1.8% for health? (Even among the top 10% of spenders, health came in only slightly higher, at 2.2%.)
One must take into account that healthy young people without families make up a fair proportion of the population, which might explain these low weightings.
Unfortunately, health and education are two areas where costs rise at rates well above the CPI rate. Private medical costs, including medical aid contributions, typically rise by three to four percentage points above CPI. Ditto for fees at private schools, colleges and universities.
Here’s an example of a household whose expenditure may differ substantially from the CPI basket: a middle-income couple in their fifties whose bond is paid up, whose two children are at university, and whose health is beginning to fail them. Their expenditure on housing would be relatively low, whereas that on university fees and medical aid contributions would be relatively high, pushing up their overall inflation figure by a percentage point or two.
While it may be difficult to calculate a precise figure for your personal inflation rate, working on a figure one or two percentage points above CPI may provide the headroom you need.
