CPi South Africa Essay Example

CPi South Africa Essay The mission of the South African Reserve Bank (SARB) is the achievement and maintenance of price stability1. The price stability of goods is maintaining a constant price level for goods and services, not essentially at the same price level but rather at a constant level of price increases, i.e. a constant level of price inflation. The SARB attempts to control this price inflation through inflation targeting. Inflation targeting is the attempt to keep the level of inflation within a certain band. In South Africa this band is between 3% -6%. The SARB attempts to use the repo rate to try and affect consumer spending and control the level of spending within the economy and hence control the price inflation of goods.  CPI for all urban areas  The level of inflation is based upon the Consumer Price Inflation (CPI) level which is released by Statistics South Africa. The CPI is based on the price changes over a one year period for a basket of goods and services. This index is based on a number of factors2 which are then weighted based on the estimated total expenditure of all South African households. Stats SA performs an Income and Expenditure Survey (IES) survey to estimated the expenditure of South Africans and hence the weightings of each expenditure3. We will write a custom essay sample on CPi South Africa specifically for you for only $16.38 $13.9/page Order now We will write a custom essay sample on CPi South Africa specifically for you FOR ONLY $16.38 $13.9/page Hire Writer We will write a custom essay sample on CPi South Africa specifically for you FOR ONLY $16.38 $13.9/page Hire Writer Prior to 2009 the CPI index was split between a headline CPI and a CPIX (excluding mortgage payments) however a number of changes to the weightings and basket of goods used in 2009 has brought these two in line and now the target for inflation targeting is the CPI for all urban areas.  Alternative Indices  There are a number of alternative CPIs that look at readjusting their weightings of the basket of goods and services to more accurately capture the CPI for specific sectors4 or people5. There are also indices that look at excluding factors of inflation in their calculations6, this can be done for a few reasons, it can help us differentiate between inflation that can be affected by SARB actions and inflation that cannot (i.e. external inflation caused by the price of oil increasing which the SARB has no control over). It can allow us to remove individual areas of inflation to also get a better picture of inflation less these areas. There are also indices based upon income group., this is known as the CPI per expenditure quintile, with quintile 1 being the lowest income and 5 being the highest. According to the IES survey for 2005/2006 the lower income households spent more of their income on food and non alcoholic beverages as well as clothing and footwear.  There are also differences in weightings and inflation make ups depending on the geographical location, there are indices that look at each of the nine provinces; indices that look at rural and urban and secondary urban areas. As expressed by Stats SA in there explanation of how they calculate the weightings for the CPI for all urban areas, not all South Africans consume the same goods or services, nor do they consume them in the same proportion. And later the inflation rate is based on the estimated total expenditure of all South African households It is important to understand that the figure released by Stats SA and ultimately used by SARB to target inflation, most probably will not match your own actual inflation rate. This is of particular importance for a number of reasons, such as workers looking for wage increase usually use the CPI rate announced in there wage increase negotiation discussions; investors looking for a fair rate of return will generally use the announced CPI in assessing their return. Ultimately it is important to assess whether or not the announced CPI is a good figure to use when asses future real returns on an individual level. My Own inflation Rate  If I am to look at a published index to best represent my inflation I would obviously start with the CPI for the City of Cape Town, secondly I would look at an index excluding mortgage payments which would be CPI excluding Housing. And lastly I would look at an index that would roughly cover my income range  Appendix  The CPI rate used by the reserve bank is obviously going to not match my expenditure on goods and services, so I have used the latest CPI realise from Stats SA to try and more accurately see my own CPI and then see if my interest are aligned by the SARBs current inflation targeting policy or if as an individual I would prefer them to act in other ways. There are hundreds of different aspects to each of the main inflation sectors, so it is important to note that this is just done as a quick assessment and is not particularly accurate. I have looked at the additional tables file for December 2009, which goes on to split the CPI per index by each province. So using the CPI for the Western Cape (which totals 6.6%) I attempted to more accurately weight each specified product and service according to my own expenditure. I have created a rough monthly expenditures table, divided up between each different expenditure category. I then looked at my weightings of each of these categories and multiplied it by the Actual CPI amount given. My rough CPI figure is 8.48%, although this is only a rough figure it is interesting to see where my exposure to CPI (insurance and my household maintenance and repair).  1 South African Reserve Bank, http://www.reservebank.co.za/ [accessed Feb 2010]  2 Food and non-alcoholic Beverages, Alcoholic beverages and tobacco, Clothing and footwear, Housing and utilities, Household contents and services, Health, Transport, Communication, Recreation and culture, Education, Restaurants and hotels, Miscellaneous goods, and services. 3 Consumer Price Index Key Changes in 2009, Stats SA, http://www.statssa.gov.za/cpi/documents/CPI%20booklet%20-%20final%2016%20Oct%2008.pdf [accessed Feb 2010]  4 CPI for Durable , semi durable or non durable goods; CPI for services and CPI for food and non-alcoholic beverages (NAB)  5 CPI for Pensioners  6 CPI excluding petrol, CPI excluding energy, CPI excluding food and NAB, CPI excluding housing; CPI excluding food, NAB, petrol and energy, CPI excluding equivalent rent; CPI excluding administered prices; CPI excluding petrol and paraffin