SIMON BROWN: I’m chatting now with Patrick Kelly, chief director responsible for price statistics at Stats SA (Statistics SA). Patrick, I appreciate the early morning time. Stats SA is going through the process of changing the basket that informs the consumer price index – in other words, inflation.
A bit of background. How often are you changing that basket and what is that process that you then go through as you make the changes?
PATRICK KELLY: Good morning Simon, and thanks for having us. It is important that the CPI basket does reflect the sorts of products and services that consumers typically are buying. As tastes change, there are new technologies and people shift their purchasing habits because of economic factors, so we do need to update the baskets as well as the weights appropriately.
Typically we’ve done this every four or so years and normally we would base it on a very extensive household survey where we record people’s spending on a week-to-week, month-to-month basis. Unfortunately Stats SA has not received funding over the last five years to perform this survey, which also is a very important input into poverty analysis and understanding inequality in the country. So what we’ve done this time around is to take information from the national accounts.
National accounts is a system of economic statistics that ultimately gives us the GDP figures. We’ve looked at the growth rates in different consumer products that are recorded in the national accounts and applied those to adjust the weight.
For the baskets what we did was we sourced detailed sales data from a range of retail chains. We aggregated that, classified it and then identified items that had particularly high expenditure that were not yet in the baskets.
SIMON BROWN: Okay. So in a sense the same answer, but just maybe a bit of a different way around. That does mean that some things are coming in – gin, for example. Certainly a decade ago only the British drank gin and now suddenly everyone does.
Printer cartridges [are in] that update. Cappuccino sachets, again, something that probably a decade ago no one really knew about, are some of those examples of products that then come in and I suppose then get their weightings within the basket.
PATRICK KELLY: Yes, that’s absolutely right. We do see certain trends over time. Gin, as you say, has experienced I think quite a big resurgence [like] the cappuccino sachets, and we also introduced pureed baby food, which are both kind of convenience foods.
We have seen over the past, say, two or three re-weightings, more and more convenience foods coming in.
Technology also plays quite a big role, so we’ve eventually got rid of DVD players, and we’ve now included soundbars and speakers. We’ve kind of split the two types of in access, the wireless (e.g. cellular) and the wired (e.g. fibre) because these are becoming much more important. So when we split the product, it means we’re going to factor the prices of those separately, and they would have their own index.
[We are] dropping traditional light bulbs and only pricing the energy-saving ones, also including music streaming within the pre-recorded music category.
These are all examples of how things change out there, and we need to ensure that the CPI basket remains relevant.
SIMON BROWN: Yes, I see that pre-recorded CDs now is a subscription – well, ‘CD subscriptions and streaming music’, which is exactly how I think many of the listeners would’ve had CDs, would have had vinyl way back in the day, then CDs. Now we stream from Spotify or Apple or something.
I imagine the process in the back end in terms of soundbar and speakers, for example, is not something a consumer buys on a regular basis. Maybe every couple of years you update, [or] maybe if you’re a massive music fan you might buy a little more frequently. So that would be a smaller constituent within the index, as opposed to, for example, jam or samp or pureed baby food, which is something which would be a more regular purchase.
PATRICK KELLY: Yes, absolutely, because we are looking at households in aggregate, all households summing up their expenditures over a year. Households obviously are buying soundbars and speakers or TVs or cars – those kind of things – on an ongoing basis, even though each individual household only buys it once every so many years.
So yes, they would typically have a smaller weight. But if you talk about a car which you buy only periodically, it’s quite an expensive item, so that then translates through to probably a slightly higher weight, even though you’re not buying it on a month-to-month basis.
SIMON BROWN: Got you. I imagine the process is smooth so we don’t suddenly see a jump in the CPI number either way. It has kind of been a rebasing of the index so that for a consumer on the outside inflation is going to continue its trajectory.
PATRICK KELLY: Yes, absolutely. Look, I’ve got to say that the changes that we’ve introduced are relatively small compared to previous updates, mainly because of the way we’ve had to go to data sources. We make sure that they come in in a smooth way to do what we call rebasing, which is where we set all the indices to 100. It’s kind of a technical process, but that allows us to introduce products in a very smooth way without any disturbance. We collect prices for these items that I’ve mentioned both in December and in January so that we have a rate of change between the two months; that allows us to kind of do it in a smooth fashion.
SIMON BROWN: I have to say inflation baskets absolutely fascinate me, particularly the bits of what’s actually in those baskets, what comes and goes. It does kind of paint that picture of a society and how we are changing, how things are evolving.
Patrick Kelly, chief director, responsible for price statistics at Stats SA, I appreciate the early morning.