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Standard Bank special report: The Consumer Wallet

There is a silver lining but we’re going to have these difficult times for a bit – Zaakirah Ismail, economist – Standard Bank.

SIKI MGABADELI:  We’re looking now at a special report from Standard Bank focusing on South African consumer behaviour and trends. It’s a series of reports and they highlight pertinent consumer trends at both the macro and the micro level. And the one we’re focusing on today is entitled “The Consumer Wallet”.

Standard Bank economist Zaakirah Ismail calculates inflation rates for each of the items in the consumer wallet for all household income brackets, in order to try and forecast the 2016 wallet. In fact yesterday we were having a conversation about the perceptions that we have about inflation that we experience, and the official inflation rates. So this is going to be a very interesting conversation about the consumer wallet. Let’s chat to Zaakirah Ismail. Zaakirah, thanks for your time this evening. Just talk us through the idea of the consumer wallet first of all.

ZAAKIRAH ISMAIL:  Thanks Siki, for having me on your show. Okay, so first of all, what we’ve done is, we look at items that consumers spend on a monthly basis. If you think of yourself as a consumer, you know that every single month you’re going to buy essential items and non-essential items. You’re going to be buying all types of categories. You’re going to be buying food, you will be spending on petrol, etc, and then also you have some kind of contributions. So you’re contributing towards your medical aid or your pension fund.

So we’ve actually constructed this wallet per income bracket. We’ve got low income, middle income and high income. And what we’ve done is we’ve calculated average household spend per item category in your wallet.

SIKI MGABADELI:  Okay, give us a sense of the types of items you’re putting in those baskets.

ZAAKIRAH ISMAIL:  Okay, so it starts like your food. We all, you know, consume food every month, petrol expenditure. We have medical aid, we’ve got pension contributions, you know, anything that you can think of that you buy when you go to the grocery store or you stop and fill petrol at a garage, or you know, debit orders that are going off your account. Those are the type of items we’ve put in the wallet.

SIKI MGABADELI:  Interestingly, you’ve found that there’s an inverse relationship between inflation and income.

ZAAKIRAH ISMAIL:  Yes. Then what we did was we said we know that the wallet is your cost per month. If you think about inflation as a cost, if you think about inflation how do your costs change month to month. That’s what we were interested in.

So what we did was we took, for each item, we grew it by its inflation rate. So how much would it grow by? And what we saw was that food obviously, because of the drought, it’s said to peak this month, so the prices of food are at an all-time high because of the drought, and what we saw was that food actually contributed a lot towards consumers who had food as a very big rate in their consumer wallet. And so that’s where we found that low-income groups actually had very high inflation rates because of the contribution of food inflation in their inflation rate.

SIKI MGABADELI:  And what’s the story with the middle- and high-income groups then? What are they spending most of their income on?

ZAAKIRAH ISMAIL:  For the higher-income groups, what you see is that they’re spending a lot on contributions, if you think about pension funds, medical aid, things like that. And then your middle-income groups have a lot of transport and also contributions within their group.

Now we know that the only sort of price fluctuation with transport is maybe oil prices and the exchange rate. So for a lot of the beginning of the year we saw oil prices at a very low price. Now they’re slowly starting to pick up. So even though inflation was affected by things like the oil price in the exchange rate, it wasn’t as badly affected as food, because food is said to peak at 12% this year.

SIKI MGABADELI:  And the difficulty I suppose, is that salaries are not keeping up with inflation at the moment.

ZAAKIRAH ISMAIL:  Unfortunately not. So if you look at the low-income group, their inflation rate predicted for 2016 is 8.6%. First of all, that’s higher than headline CPI, which is 6.6% that we’re predicting. And also, you know, salary negotiations we’re seeing are actually slowing down, and what we did in our 2016 wallet was that we grew people’s incomes by 6%. So you have your cost escalating by, say, 8.6% if you’re in low income, and your salary is only going up by 6%. So your wages are not keeping up with your costs every month.

SIKI MGABADELI:  Alright, and expectations are that we’re going to see more of that trend going forward?

ZAAKIRAH ISMAIL:  Well, I can say this. Consumers need to start being a little bit more savvy in terms of, you know, trying to switch from non-essential items and switching to cheaper goods, but we do actually see that trend in food inflation turning around in 2017 where we’re seeing food prices dropping because there’s only a 10% chance of the drought going into 2017. So there is a silver lining but, you know, we’re going to have to ride these difficult times for a bit.

SIKI MGABADELI:  Certainly. Thanks for your time today. Zaakirah Ismail is an economist with Standard Bank.

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