My take on the consumer price index, in a letter to the editor of Business Day published today.
GAVIN Keeton’s column (Why consumer inflation feels higher than it is, March 4), refers.
Prof Keeton points out that the basket of goods consumers buy each month is not the same as the one Statistics South Africa measures and tracks to calculate inflation.
He is quite correct. Statistics South Africa measures and tracks some 70,000 price points to calculate price inflation each month. I’m prepared to bet that no South African consumer bought 70,000 different consumer goods and services last month.
Perhaps these consumers buy 70,000 goods and services through the course of a lifetime, but certainly not each and every year, even less so each and every month. Thus, the consumer price index is irrelevant to most consumers, no matter what statisticians or economists say.
Prof Keeton to a large degree exemplifies the central planning mindset that has overcome the intellectual elites.
These folk essentially tell individuals that if they are experiencing a different reality to the one purported by “official” government statistics, those individuals are wrong. This obscures the fact that price inflation affects various people differently.
Prices increase in a lagged response to new money and credit that is injected into the economy. The first receivers of the newly printed money (government, bankers, wealthy and creditworthy businesses and individuals) get to spend it before prices have risen.
The last receivers of the newly printed money (pensioners, labourers, those who lack access to credit) only get to spend it after prices have risen. The former grow wealthier in the inflation process than the latter, and income inequality rises.
This rippling, uneven effect of inflation is known as the Cantillon effect. The distribution of gains and losses can change with each inflation cycle. Some win, some lose, but in every instance, many lose.
We should be moving away from thinking about the economy as a blob of activity by looking at one-dimensional figures such as the consumer price index.
By giving this practically irrelevant inflation rate such high importance in central planning, policy makers and their economist apologists serve to obscure much of what is really going on beneath the surface.
Economist, ETM Analytics (Pty) Ltd