The inflation myth

Financial Matters: Tinashe Kaduwo

Welcome to the weird world of inflation, where individuals’ personal experiences and perceptions of inflation are derived from the official inflation figures expressed through the Consumer Price Index (CPI).

Recent data from ZimStat show that annual rate of inflation has surged to 56,9%, making it the highest in 10 years. ZimStat attributes this latest increase to a rise in prices of basic goods. Indeed prices have shot up with some by margins of more than 100% which has resulted in some people questioning the accuracy of the inflation figures as measured by CPI.

If one suspects that the official inflation figures do not accurately reflect the true price surge, he may be right. The main reason is that the CPI is calculated off a basket of goods and services bought by the average household, but that basket is based on data that can be up to three or even five years old. In the intervening period, households have changed their spending habits, for example, shifting from more expensive goods to less expensive ones or the other way round.

In cases where individuals shift from expensive goods to less expensive ones, real CPI could be as much as a whole percentage point less than the official figure which many may fail to accept. More often, our instincts deceive us as human perception is a pretty frail thing. That is the reason we need official statistics, despite the fact that they are based on data that is a few years behind.

CPI is designed to measure household inflation, but in so many cases, nobody is average. This implies that each and every individual experiences a different level of personal inflation. Some independent economists estimate the country’s inflation at more than 200%. It is understandable since they will be using a different methodology or other yardstick other than the CPI. The average household is not made up of solely urbanites or rural dwellers, neither stock investors nor non-investors but all at the same time.

The average household is part-renter, part-homeowner and these aspects experience different levels of inflation. For instance, 5,88% of the basket of goods and services used to calculate CPI is actual rentals for housing. Very few lodgers would pay so little for the roof over their heads whilst homeowners pay no rent at all. This is an area that statistical agents should look at. There are some suggestions that ZimStat is understating the weight of rentals in the consumer basket. To some, rentals take out as much as 50% of their monthly income.

Not every common household cost is also included, or fully-represented, in the basket of goods and services used to measure the CPI. Interest on mortgages, for instance, is commonly not included. This raises some concerns since an increasing number of homeowners pay mortgages, which in most cases eat up a significant proportion of incomes.
Interest on mortgages is commonly left out so as not to cause a virtual feedback loop, as the CPI is used to help central banks to set official rates, which influences how much banks charge for their mortgages.

Despite all this, official CPI cannot be dismissed, but remains a more reliable yardstick in estimating inflation. There is common human tendency to see inflation as higher than it really is. People normally experience the disappointment of a price rise more keenly than they do a price fall, making them more likely to remember it. People may, for example, mistake a rising food bill as food inflation, rather than their children growing, leading to them eating more. These are some of the interesting dynamics and perceptions on inflation.

Changes in quality of the product also have implications for the CPI. A huge jump in quality of a product or service accompanied by a marginal rise in price may even result in drop in price. When prices stay largely the same, but the quality of goods and services improves, such as is often the case with electronics, telecoms and mobile phones, then that is registered as a drop in price when it comes to the CPI.

It is indeed a weird world and official numbers may seem to be divorced from reality, which may not be the case.

Kaduwo is a researcher and economist. —