Who benefits from inflation-targeting?
- Paul Berkowitz
- South Africa
- 30 Jul 2013 01:34 (South Africa)
On Wednesday last week, Statistics South Africa (StatsSA) released the June consumer price index numbers. Headline inflation surprised the market by only increasing 5.5% year-on-year. Analysts are talking about monetary policy remaining looser for longer, while estate agents are sharpening their smiles. Some economists agree with the inflation-targeting policy and framework, others vehemently oppose it. What should be beyond debate is that the CPI ‘basket’ only has relevance to the richest 10% (or maybe 20%) of households. By PAUL BERKOWITZ.
The graph below represents the official inflation rate, from January 2009 to June 2013, derived from StatsSA’s headline CPI figures. The shaded band refers to the Reserve Bank’s inflation target of between 3% and 6%.
Officially, the inflation cycle peaked in 2008, although the highest inflation figure since 2009 was 8.6% in early-2009. After that, inflation fell steadily and re-entered the target range in early-2010. It stayed within the target range for the rest of 2010 and most of 2011, breaching 6% in late-2011. Until mid-2012 it remained just outside the target range, but since then it’s remained below 6%.
In recent months inflation has threatened to rise above 6%. When the June 2013 inflation figure came in below market expectations at 5.5%, a general sense of relief swept the business world. A weaker rand, higher oil prices, high wage demands in the platinum industry and the ever-present pressure from administered prices had all raised the risk of higher inflation.
The Reserve Bank has, for the most part, fulfilled its inflation-targeting mandate. But how well does its mandate serve the interests of the majority of South Africans?
The next graph compares the overall inflation rate (in blue) to the inflation rate experienced by different groups of households. StatsSA compiles a number of different inflation baskets, including a basket for households grouped by income levels.
The five other lines, ranging in colour from red to dark green, show the inflation rate for five different groups of households organised by income levels. Each line represents one quintile (20%) of total households. The red line shows the inflation rate for the poorest 20% of households (the ‘very low’ income households). The dark green line shows the inflation rate for the richest 20% of households.
It’s clear that the headline inflation rate is very similar to the inflation rate of the richest 20% of households. The headline rate is based on the overall spending in the economy, and the richest 20% are responsible for most of the spending – 59% of total spending is done by the richest 20% of households. In contrast, the spending by the poorest 20% of households makes up just 3.5% of total spending.
These are the official figures as per StatsSA’s CPI 2012 weights release. This does indicate some sort of trend in reducing the inequality of household spending, but not by much: according to the 2008 weights the richest 20% contributed 64% of total spending while the poorest 20% made up 3.2% of total spending.
For most of the last four and a half years the inflation rate of the richest households has been lower than the official inflation rate. In fact, inflation has been below 6% for this group since early-2010.
For the other 80% of households inflation has been above the target range for most of the last two years. For the poorest households inflation peaked at around 13% in early-2009 and has averaged 7% over the last two years.
The biggest contribution to the consumption basket of poor households is food. For the richest 20% of households food makes up 9% of their basket. This jumps to 22% for the next 20% of households, and the poorest 20% of households spend 39% of their income on food.
The graph below shows the trends in food and public transport price increases. Public transport only makes up 1.3% of the spending for the richest households but it absorbs 6.0%-8.6% of the spending of poor households (7.2% of the spending of the poorest 20% of households).
It’s clear from the graph that the price increases of food and public transport are much more volatile than the general level of inflation. Food and public transport inflation were well above 15% in early-2009 and close to 0% in 2010. For the last two years public transport inflation has been well above the inflation rate.
It’s not surprising that the inflation experienced by poorer households is also more volatile than the official inflation rate. These households are the least able to absorb shocks to their monthly budget but they’re the ones most at risk to such shocks.
People’s opinions will differ on what should be done. Some will call for greater subsidisation of poorer households, maybe for price ceilings on essential foodstuffs. Some will call for measures to increase the food security of poor households and investigations into the value chains of basic goods.
So far only the facts have been presented, and from here there are many directions that the discussion can take. These include a debate over the role of government in lowering the costs of public transport and whether high food prices contribute to the poverty of the poorest. These discussions are beyond the scope of this article but they are important discussions to have.
The merits (or lack) of the country’s monetary policy, particularly the inflation-targeting regime, are also part of a wider discussion. What is beyond debate is that inflation targeting isn’t particularly pertinent to poorer households. The policy framework is constructed using a measure that is skewed heavily in favour of the richest households’ experience. A policy framework that is only relevant to the richest 20% of the population hardly seems the best way to confer universal benefit from the policy itself.
This election year, if the various parties want to reach the populace, they’re going to have to at least pretend to grapple with the issues that are important to them. The official inflation rate is not one of those issues. DM
Photo: A man walks past a shop window displaying designer clothes on a Durban street, January 17, 2012. REUTERS/Rogan Ward