Measuring price changes on a year-on-year basis will give a better picture of how sustained price increases have been, eliminating some of the monthly volatility
28 September 2023 - 04:00
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We agree that underlying inflation momentum is very important. But great care should be exercised in annualising trends, as various factors affect monthly changes and these don’t necessarily imply new, sustainable trends.
First, not all items in the consumer price index (CPI) basket are surveyed every month. For example, municipal charges for water and electricity are typically surveyed in July/August — which means this subindex remains unchanged between September and June. The monthly increase in CPI will thus be very high in July (reflecting the updated prices) and then 0% for the remainder of the year.
Other examples are education (typically surveyed in March) and medical aid contributions (typically surveyed in February and April).
Comparing month-on-month increases in high survey months with low survey months will indicate sharp increases — high inflation — in the monthly index. And even more so when this monthly price change is then annualised.
Second, though fuel prices are surveyed monthly, they can be notoriously volatile, reflecting changes in international petroleum product prices and the rand/dollar exchange rate. This is also true for food prices — especially during periods of adverse weather.
This means that measuring price changes on a year-on-year basis will give a better picture of how sustained these price increases have been, eliminating some of the monthly volatility. It also allows comparison to the same basket surveyed a year earlier.
That said, there is obviously a benefit in identifying underlying price pressures or momentum by looking at monthly changes (expressed at an annual rate). But for this purpose, most economists prefer core inflation, which excludes volatile fuel and food prices and, in the case of South Africa, also electricity prices.
Regarding some specific numbers mentioned in the article: the authors state that “CPI rose from 109.8 in June 2023 to 110.8 in July, a large monthly increase of 0.9% — equivalent to an 11.5% annualised rate”.
In our view, it is important to acknowledge that the subindex of municipal charges for water, property rates and electricity was surveyed in July, and was thus responsible for the bulk of the monthly increase, as it contributed about 0.7% of the 0.9% month-on-month increase (or 8.6% of the 11.5% annualised increase).
In similar vein, the sharp annualised inflation rates during February and March are largely reflective of one-off surveys of education and health insurance.
Finally, with regard to the inflation outlook, the Reserve Bank is of the view that inflationary pressures are moderating. On a year-on-year basis, core inflation has already slowed from 5.3% in April 2023 to 4.8% in August and is forecast to slow further to 4.6% in October.
Theo Janse van Rensburg Head of macro-forecasting, Reserve Bank
The FM welcomes concise letters from readers. They can be sent tofmmail@fm.co.za
Support our award-winning journalism. The Premium package (digital only) is R30 for the first month and thereafter you pay R129 p/m now ad-free for all subscribers.
LETTER: Inflation: compare apples to apples
Measuring price changes on a year-on-year basis will give a better picture of how sustained price increases have been, eliminating some of the monthly volatility
“No, Inflation Isn’t Falling — Here’s Why” (On My Mind, September 7-13) refers.
We agree that underlying inflation momentum is very important. But great care should be exercised in annualising trends, as various factors affect monthly changes and these don’t necessarily imply new, sustainable trends.
First, not all items in the consumer price index (CPI) basket are surveyed every month. For example, municipal charges for water and electricity are typically surveyed in July/August — which means this subindex remains unchanged between September and June. The monthly increase in CPI will thus be very high in July (reflecting the updated prices) and then 0% for the remainder of the year.
Other examples are education (typically surveyed in March) and medical aid contributions (typically surveyed in February and April).
Comparing month-on-month increases in high survey months with low survey months will indicate sharp increases — high inflation — in the monthly index. And even more so when this monthly price change is then annualised.
Second, though fuel prices are surveyed monthly, they can be notoriously volatile, reflecting changes in international petroleum product prices and the rand/dollar exchange rate. This is also true for food prices — especially during periods of adverse weather.
This means that measuring price changes on a year-on-year basis will give a better picture of how sustained these price increases have been, eliminating some of the monthly volatility. It also allows comparison to the same basket surveyed a year earlier.
That said, there is obviously a benefit in identifying underlying price pressures or momentum by looking at monthly changes (expressed at an annual rate). But for this purpose, most economists prefer core inflation, which excludes volatile fuel and food prices and, in the case of South Africa, also electricity prices.
Regarding some specific numbers mentioned in the article: the authors state that “CPI rose from 109.8 in June 2023 to 110.8 in July, a large monthly increase of 0.9% — equivalent to an 11.5% annualised rate”.
In our view, it is important to acknowledge that the subindex of municipal charges for water, property rates and electricity was surveyed in July, and was thus responsible for the bulk of the monthly increase, as it contributed about 0.7% of the 0.9% month-on-month increase (or 8.6% of the 11.5% annualised increase).
In similar vein, the sharp annualised inflation rates during February and March are largely reflective of one-off surveys of education and health insurance.
Finally, with regard to the inflation outlook, the Reserve Bank is of the view that inflationary pressures are moderating. On a year-on-year basis, core inflation has already slowed from 5.3% in April 2023 to 4.8% in August and is forecast to slow further to 4.6% in October.
Theo Janse van Rensburg
Head of macro-forecasting, Reserve Bank
The FM welcomes concise letters from readers. They can be sent to fmmail@fm.co.za
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