Many of us feel instinctively that the official CPI inflation rate does not reflect our own experience. I seem to be spending much more on food now than 12 months ago – despite the 5.5% inflation rate. ETM Analytics is working on its own inflation indicator, and ZA Confidential asked Russell Lamberti what it is and what it shows….
ZAC. When did you start this, and what is the aim of the exercise?
RL. We conceived of the idea in early 2013 and started measuring the basket price in March 2013. The aim is to assess how closely an ‘everyday’ shopping basket cost tracks official CPI and retail inflation statistics. South Africans constantly complain that official CPI data doesn’t reflect their personal reality. We’ve investigated Stats SA’s methodologies and find that there are techniques in measuring the CPI that probably bias the measure downward over time. We’ve decided to measure a simple, representative shopping basket over time to see if the price inflation pressures on it validate or challenge the official picture.
ZAC. What is in the index?
RL. There are about 20 grocery items in the basket (things like bread, chicken, soap, toothpaste, coffee, rice, maize meal, milk and so on). There is a mix of basic necessities and less necessary goods like chocolate and coffee. We’ve chosen to always buy the same brands, and we’ve chosen the most popular brands. Popular brands are less prone to price volatility and are highly purchased, making the basket that much more representative.
ZAC. How reflective is your index of the average South African shopper? Is there a type you can identify who would match the index quite closely?
RL. We track a very standard shopping basket at PnP, Checkers, Spar and Woolies stores in Fourways. The stores typically price their products on a national basis, although store managers in some instances do have some discretion here. Fourways is a good choice because a) it is close to our offices:) and b) it is a confluence of the middle income suburbs of Fourways, the high-income Dainfern, and the low income Diepsloot. All these income groups shop in Fourways. So we think the basket is a good representation of simple ‘retail’ inflation that most shoppers experience. We’ve kept our basket simple and included items which, on the whole, rich and poor households all buy.
ZAC. What has been the movement so far?
RL. The index is up 9.2% from March to November 2013. So that is 8 months’ worth of data. If you had to annualise that, it would be an annual shopper’s inflation rate of 14.1%, which is more than double the current official rate of CPI inflation and also other official measures of retail inflation. There is potentially some seasonal caveats to this, so we reserve full judgement on the y/y figure until March 2014 when we have a complete full year picture. Nonetheless, the basket inflation is quite startling so far and I think far more in line with people’s intuitive sense of price escalation in their everyday expenses at the shop.
ZAC. Any big movers?
RL. Chicken has been a big mover. This is due to ‘ordinary’ inflation but also the result of tariffs on chicken imports. Coffee, olive oil and salt are also up strongly, but there has actually been a broad-based increase in prices in the basket. 12 of the 20 items increased by more than 6% in just 8 months, or over 9% annualised. Of these 12 items, 6 are up by over 15% annualised. 5 items of the 20 are the same or lower in price than they were 8 months ago.
ZAC. Why do you think your index seems to be rising much faster than the official CPI index?
RL. Not an easy question. Official CPI is a much broader basket, covering school fees, rent costs, transport costs, energy costs and so on. It’s possible that there is less cost escalation in these items than in grocery items – we still need to investigate this further. Additionally, Stats SA weights its basket heavily toward highest 20% of income earners who tend to spend a lower proportion of their incomes on groceries, but this is clearly not a broadly representative approach of most South Africans. Finally, we need to remember that the CPI inflation rate presently is a y/y measure, while the ETM basket only has 8 months’ worth of data – we’ll have a more accurate comparison in March 2014. But certainly if we see the ETM basket inflating in price much more than the official CPI for a prolonged period of time it would raise some red flags on the CPI methodology. The strength of the ETM basket methodology is its simplicity – it measures the cost of buying the same 20 broadly representative items at four nationally representative major retailers in a busy and demographically diverse retail precinct.
ZAC. Are there lessons to be drawn from your findings?
RL. The most important lesson at this stage is that people’s intuitive concern about their daily shops rising in price much stronger than inflation seems to be correct. Over time we will be able to draw out more and more lessons. If indeed Stats SA does systematically underestimate the extent of inflation, this has profound implications for monetary policy and wage bargaining. The ETM basket does not purport to be the definitive answer to these questions, only to provide another interesting and objective measure of price inflation that can inform this debate. We have however done other, proprietary work for our clients which shows that broad-based inflation in South Africa is considerably higher than the official CPI data reports.
ZAC. Do you think policy makers should/will pay attention to what you are doing?
RL. Yes, over time I believe they will. We know that the ETM basket price index will take time to gain traction and credibility. We’d certainly like to run it for at least two years before we start placing greater confidence in it, so by March 2015 we think it will tell an interesting story and be a very useful cog in the inflation debate. ETM is well-respected by our clients and policy makers alike, and so this is certainly an area of research that I think policy makers will pay more and more attention to in the coming months and years.
ZAC. Is there a long-term strategy for this exercise?
RL. In a sense yes, but we’re also just letting the data emerge month by month for now. Let’s get to March 2015 and have two solid years of data under our belt and then we can assess things from there. Certainly as a broader concept of understanding the true loss of purchasing power of the currency, which is really what inflation data should be capturing, ETM is committed to feeding information to our clients that gives the most accurate picture possible. As they say, a huge part of investment success is exploiting the gap between perception and reality. To the extent that inflation reality is strongly divergent from inflation perceptions, there is an opportunity to be exploited for investors.
Conclusion: Bravo ETM. A useful, interesting and informative initiative. One to watch!
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