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How headline CPI can prejudice salary increases

The need to eat contributes to poorer income groups experiencing a higher rate of inflation, which can widen the wage gap.

Most employed South Africans receive an annual salary increase, which is meant to enable the employee to keep up with the cost of living. The most commonly known inflation figure is the headline consumer price index (CPI) inflation rate, which is quoted in the media when Statistics South Africa releases its monthly inflation figures.

Despite CPI reflecting the state of inflation in the economy as a whole, it has very little relevance to most individuals in their personal capacity.

This is because the share of their individual income that they spend on goods and services differs in quantum and distribution from that of the average economy (which is what headline consumer price inflation measures).

True inflation

A more granular approach to determining the true inflation rate faced by individuals is to consult the inflation rate per expenditure decile. This means which 10% of spend the individual falls in, from the lowest (1) to the highest (10) earners across the whole economy. Table 1 illustrates how different income groups spend their income on goods and services in different proportions.

Table 1: Expenditure by income group

Expenditure decile
Group 1 2 3 4 5 6 7 8 9 10
Food and non-alcoholic beverages 48.10% 47.00% 38.70% 31.70% 29.60% 25.60% 23.90% 21.60% 16.90% 10.70%
Alcoholic beverages and tobacco 3.90% 3.00% 4.20% 5.80% 5.10% 5.90% 6.10% 6.30% 6.90% 5.60%
Clothing and footwear 8.80% 8.80% 7.70% 5.70% 6.30% 5.20% 5.00% 4.80% 4.00% 2.70%
Housing and utilities 17.30% 15.30% 25.30% 35.20% 36.40% 39.20% 37.60% 32.80% 27.70% 16.40%
Household contents and equipment 2.60% 3.00% 2.80% 2.50% 2.60% 2.40% 2.40% 2.90% 3.80% 5.70%
Health 0.70% 0.70% 0.60% 0.50% 0.50% 0.50% 0.50% 0.70% 0.80% 1.80%
Transport 1.20% 2.00% 2.50% 3.40% 3.60% 5.80% 7.40% 8.90% 11.70% 21.10%
Communication 7.00% 5.70% 4.70% 3.40% 3.10% 2.70% 2.50% 2.60% 2.70% 2.40%
Recreation and culture 1.90% 2.30% 2.60% 3.10% 3.10% 3.50% 3.50% 4.30% 4.50% 6.30%
Education 0.30% 0.40% 0.60% 0.60% 0.80% 0.90% 1.30% 1.90% 2.90% 3.40%
Restaurants and hotels 3.80% 5.10% 4.00% 3.30% 3.10% 2.70% 2.60% 2.70% 2.30% 3.50%
Miscellaneous goods and services 4.50% 6.70% 6.50% 4.90% 5.90% 5.70% 7.20% 10.50% 16.00% 20.30%

Source: Stats SA Income and Expenditure Survey, 2010/2011

On average between 2009 and 2018, the poorer income groups have faced a higher inflation rate than the richer income groups. Table 1 illustrates how the relative importance of food impacts a poor individual’s spending more than that of a rich individual.

The poor spend 48% of their income on food and non-alcoholic beverages, while the rich only spend 11%.

A prime example of this can be seen in 2016’s stats, as food and non-alcoholic beverages increased by 10.5%, which contributed to the lowest earners facing an inflation rate of 7.6%.

The effect of this is that if a standardised (identical) increase was given to all occupational levels in the organisation, then the wage gap would increase in real terms over this period. Table 2 illustrates the inflation rate faced by each expenditure decile between 2009 and 2018.

Table 2: Inflation rate by expenditure decile

Expenditure Decile 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Avg
1 9,0% 3,1% 6,0% 7,0% 6,3% 6,2% 5,4% 7,6% 3,8% 2,8% 5,7%
2 9,0% 3,1% 6,0% 7,0% 6,3% 6,2% 5,4% 7,6% 4,3% 3,0% 5,8%
3 9,1% 3,2% 5,8% 6,8% 5,9% 6,2% 5,1% 7,5% 4,5% 3,4% 5,8%
4 9,1% 3,2% 5,8% 6,8% 5,9% 6,2% 5,1% 7,5% 4,7% 3,5% 5,8%
5 8,9% 3,3% 5,6% 6,6% 5,9% 6,1% 4,9% 6,9% 4,6% 3,7% 5,6%
6 8,9% 3,3% 5,6% 6,6% 5,9% 6,1% 4,9% 6,9% 4,7% 3,9% 5,7%
7 8,0% 4,0% 5,7% 6,4% 6,0% 6,1% 4,4% 6,3% 4,9% 4,2% 5,6%
8 8,0% 4,0% 5,7% 6,4% 6,0% 6,1% 4,4% 6,3% 5,1% 4,6% 5,7%
9 6,6% 4,6% 4,7% 5,3% 5,7% 6,0% 4,6% 6,1% 5,5% 5,0% 5,4%
10 6,6% 4,6% 4,7% 5,3% 5,7% 6,0% 4,6% 6,1% 5,5% 4,9% 5,4%
Headline CPI 7,1% 4,3% 5,0% 5,6% 5,8% 6,1% 4,6% 6,3% 5,3% 4,6% 5,5%

Source: Stats SA

Table 2 illustrates that besides 2010, 2017 and 2018, the inflation rate faced by each expenditure decile has been regressive – in other words, the higher the earning group, the lower the headline CPI.

This means that the poorest individuals have generally faced the highest instance of inflation.

As a result, expenditure deciles one to eight (the lowest eight expenditure deciles) faced an inflation rate above that of headline consumer price inflation every year except 2010, 2017 and 2018.

Wage-gap impact

The final column indicates the average inflation rate per annum between 2009 and 2018. If headline consumer price inflation was universally given as the annual salary increase to all employees, then the only two expenditure deciles that would be better off in real terms are the two highest (deciles nine and 10). These two deciles would have gained 0.1% per annum in real terms between 2009 and 2018. Conversely, expenditure deciles one and two would have lost 0.2% and 0.3% respectively per annum in real terms between 2009 and 2018.

The information contained in the two tables suggests that using headline CPI in isolation when determining annual increases can have adverse effects on the wage gap.

Furthermore, the importance of food and non-alcoholic beverages in the basket of goods and services, which represent the lowest expenditure deciles, suggests that this inflation rate cannot be ignored when determining the true inflation rate faced by the lowest-earning employees.

Inflation should not be the sole determinant of an annual increase. However, if it is to be used as an input factor, one should recognise the difference between headline CPI and the real inflation rate faced by individuals.

Bryden Morton is data manager and Chris Blair CEO at 21st Century.

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If we consider that inflation is a favourite tool used by the government to decrease the value of its financial obligations and that the level of inflation is mostly within government’s control, then the wage gap is the logical result of government action. Inflation is a mechanism that transfers wealth from the poor to the wealthy, from those who don’t own assets, to those who do. The supporters of a socialist government create their own wage gap and their own inequality through larger debt levels and more deficit spending. The populist government drives inequality, and then they try to rectify their mistakes by punishing(raising the tax bracket) those who try to protect themselves from government action.

I love the use of jargon when it’s used to state the obvious, the rich get richer and the poor just suck it up. in SA it’s a question of a rotten/incompetent/directionless government denying the voters pretty much everything they need.

Somehow the writers overlook the most significant statistic:

The richest people spend more than ten times (of after-“progressive” tax income) on education than the poorest. What is the secret that they know?

Panyaza Lesufi?

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