Household Sector – CPI inflation for the low income groups remains alarming

Overall June CPI (Consumer Price Index) inflation of 6.25% doesn’t create too bad a picture. However, when split by “expenditure quintile” the picture becomes more alarming, with the poor being hit hardest due to the influence of food prices. This is a key cause for concern in the current time of heightened “social tensions”.

The boundaries of the quintiles, as compiled by StatsSA, were obtained by calculating the quintiles (five equal groups) of the total number of households in South Africa and selecting the total expenditure of the top household (ranked according to expenditure) as the expenditure cut-off point in each of the quintiles.

The five quintile categories were defined according total expenditure per household as at 2010/2011 and price updated to December 2012. These categories are as follows –

• Quintile 1 – up to R 21 399;
• Quintile 2 – R 21 400 up to R 35 750;
• Quintile 3 – R 35 751 up to R 61 624;
• Quintile 4 – R 61 625 up to R 142 083; and
• Quintile 5 – R 142 084 and more.

Although measured by expenditure, these expenditure groupings are a very good proxy for income group, Quintile 1 being the poorest and Quintile 5 being on the whole the highest income earners. The divide between the highest and the lowest quintile has not been so wide since a time back in 2012.

Whereas Quintile 1 had an inflation rate of 8.13% in June 2016, Quintile 5 at the other end of the spectrum had a rate of 6.08%, more than 2 percentage points lower.

The key reason for this wide gap in overall inflation rates by quintile of late has been double digit Food and Beverage Price inflation to the tune of 10.8% as at June 2016.

For the lower income earners, Food and Non-Alcoholic Beverages have a far higher weighting in their expenditure basket. Quintile 1 has a food and beverage weighting of 37.5% of total expenditure, while quintile 5 (the highest expenditure group) has a lowly 9.93% weight for this category of consumer items.

The high income earners have thus been far less exposed to the high drought driven food price inflation of late.

One other factor which sometimes creates big CPI inflation inequality between quintiles, although currently a minor contribitor, is the high dependence of low income earners on public transport, versus the higher income earners who are more exposed to private transport costs.

When petrol price inflation fluctuates wildly, the cost increases or decreases are passed on very quickly to the user of private transport.

On the other hand, public transport providers tend to absorb quite a sizeable portion of volatility in fuel prices, making public transport price inflation less volatile than that of private transport.

Therefore, recent petrol price declines have benefited higher income earners a little more, with the CPI for Private Transport Operating Costs showing 0.2% year-on-year inflation (the petrol component at -1%), while public transport cost inflation a little higher.

The recent differential in public vs private transport cost inflation is not a major one though. Currently it is largely about food price inflation

CPI inflation isn’t just all about what it implies for interest rates. Higher food price inflation, and thus higher overall CPI inflation for the poor should be the key concern at present. South Africa is in a period of heightened financial pressure and heightened “social tensions”. The higher inflation rate for the more vulnerable low income groups can contribute further to such tensions.

One potential risk can be further upward pressure on CPI inflation and thus indirectly on further labour-shedding, too, should the result of this high CPI inflation for these groups mean higher wage demands.

Read more here: Property_Barometer_ CPI_Inflation_Expenditure_Groups_20_July_2016