Why does inflation differ from real-world increases in cost of living? A guide for reporters

The prices of wheat and oil on global markets are, at the time of writing, dropping from recent highs, but the cost of living crisis is far from over. Interest rates are rising, there’s a lot of uncertainty about future supplies of resources from Ukraine and Russia, and many countries on our continent carry huge debt burdens. While many African journalists are more familiar with the challenges that extreme inflation brings than their Western counterparts, it’s still a tough subject to report on.

While compiling data around economic indicators for the continent, Africa Data Hub polled reporters and economists about the challenges they face reporting on inflation, and without exception, the number one question they told us that they get asked by readers and clients is the same. “Why doesn’t the inflation rate match the increase in my household expenses?”

What is inflation? See article one in this series for an overview of inflation in Africa.

Monthly inflation numbers are a staple part of the news agenda everywhere, but connecting the national rate of inflation with real people’s lived experience is tough. A government will announce that inflation is running at 5%, 7% or 10% year-on-year, but what people see is that the cost of paraffin went up by more than that last month, and food staples by a third since Christmas. Why is there such a disconnect?

The causes of inflation

Just to recap, consumer price inflation (CPI) is a measure of price changes over time, and usually reported in the press as a percentage rate. The causes of the current high inflation rates around the world are well known. The economic impact of Covid-19 was huge: people lost jobs and the global network supply chains which have evolved over the last 30 years jammed as shipping and manufacturing ground to a halt. When people returned to work, these jams remained, pushing the supply of goods and demand further out of sync and thus raising prices.

And then, of course, there is the impact of the invasion of Ukraine by Russia. Two of the world’s most important fuel and food suppliers are now effectively locked out of markets either because their fields and ports are now a warzone (Ukraine) or because of punitive sanctions imposed for breaking international law and attacking a sovereign nation (Russia).

The economic impact hits those already struggling the hardest. Events are moving fast, and it’s important to remember that inflation is a measure of what happened, not what is happening right now, or in the future. Often, it can take statistics offices a few months to gather the data required to report data, so the inflation rate reported today may be based on the price of goods eight weeks ago - and that’s only the start of unpacking the issue.

Inflation is a measure of what happened, not what is happening right now, or in the future.

How inflation is calculated

If the question is “why does the current inflation rate not match actual cost of living increases?”, part of the answer is in understanding how inflation is calculated.

Every individual in a country has their own personal inflation rate, because they live in different places (where house prices are more expensive/cheaper), and buy goods of different quality in different shops. The national rate is a “best guess” at the average rate for everyone in a country - and because it is at a national level average, it doesn’t really reflect anyone’s actual experience.

When we talk about inflation, we’re really talking about Consumer Price Inflation (CPI). National statistics offices calculate this by establishing a standardised “basket” of goods and services that a typical household might buy over the course of a month. This is a mix of foodstuff, entertainment services, housing costs and utility bills, and is unique to each country.

The South African basket is shown below.

The basket is usually designed to cover the range of goods and services described at a high level by the United Nations Classification of individual consumption by purpose (COICOP). This breaks down purchases into groupings such as clothing and footwear, food and non-alcoholic beverages, communications and so on. The purpose is to better understand what proportion of their income households are spending in different areas compared to norms, and also to compare data between countries.

Here’s the differences in South African and Kenyan baskets, for example.

The real world costs of items will differ inside a country’s borders depending on where you live, either by province or region, or if you are in a rural or urban area. So every month, statisticians take a snapshot of the basket price in a variety of locations and then create a national number by applying a weighting system for each location based on the number of people who live there.

Comparing inflation rates within a country is rarely done, although arguably would be very meaningful. In South Africa, for example, the non-profit organisation Pietermaritzberg Economic Justice and Dignity attempts to do just this, maintaining a monthly basket of its own which it calls the Household Affordability Index. This is separate to StatsSA’s calculation, and highly detailed in terms of basket content and localised prices to some key areas.

Comparing inflation data over time

Inflation data is, like most other data, only really meaningful when compared to something else. If inflation is 10% but average wage increases are 12%, for example, the cost of living would be going down. So is 10% year on year inflation high? We can only really say when we look at historic data, or that for neighbouring countries.

This visualisation shows inflation rates broken down by COICOP indicator for Africa countries - you can select which countries and which indicators you want to compare.

This data is taken from the IMF’s data portal, with the exception of Kenya’s data, which is scraped directly from the Kenyan National Bureau of Statistics. You’ll notice that there are gaps in the data and not every country is up-to-date or complete. In many cases, inflation data is only published in PDF format and not shared with global aggregators like the IMF. We’re working on fixing that.

What’s the difference between annual and monthly inflation rates?

Most of the time, the inflation rate that is in the headlines is the national CPI number, shown as percentage change over the same period in the previous year. This is not always the case - in South Africa the rate that gets most coverage is the one for urban centres, not the nationally inclusive rate.

More importantly, looking at year on year change can be very misleading.

Think of it this way - if there is a 20% price increase in July due to a problem in June, unless there is a drop in prices at some point, then every month for the rest of the year will report an increase of 20% over the same month in the previous year. March this year will almost certainly show at least a 20% price increase over the previous March.

That makes it very hard to unpick what is actually happening right now using year-on-year numbers, and it will take 12 months for the inflation rate to drop. For most of the year, it might look like current economic circumstances are worsening while they are actually staying the same. A sudden decrease in the rate next June may not be reflected in annual numbers because of this lag of annual reporting and may in turn mask a much worse situation than the numbers suggest.

To illustrate this, the chart below shows headline inflation in Rwanda over a seven year period. Look at how many times month on month inflation was actually negative, and prices were falling, but annual inflation numbers were as high as 7% (May 2017 is highlighted as an extreme example).

The inflation rate still doesn’t reflect my standard of living

If you lived in Rwanda in 2017, of course, both those numbers may not feel real. What should be clear by now is that collecting all this data on a regular basis is, as Prof Evan Gilbert of Stellenbosch Business School puts it, “very expensive and time consuming”. It requires a huge number of resources to do accurately and regularly.

What’s more, updating the CPI basket of goods and services to reflect current spending habits is such a mammoth task it can take years to compile the data.

In Kenya, for example, the CPI basket was last updated in 2020. The number of items in the basket went from 234 to 330, to reflect the broader range of goods and services now consumed. The weighting of the basket - ie how much a loaf of bread should count for compared to a mobile phone bill - was based on numbers from the 2015/16 household survey.

In other words, although consumer habits and tastes may have changed a lot in the last two years, as a result of Covid-19, some of the numbers used to calculate “what the average household spends” are up to seven years old.

No wonder the inflation rate doesn’t match lived experience today.

For journalists, then, it may be more useful to look at those basket items which are common to everyone, such as changes in food prices, rather than the overall inflation rate.

Those whose jobs depend on being able to understand inflation spend almost as long unpicking the numbers as statisticians take to compile them, says Sanisha Packrisamy, an economist at Momentum Investments. She points out that the more recent and higher quality the data about inflation, the better informed businesses can be about planning and investing. Where data is sporadic and low quality, as it often is on the continent, extra risk is priced into any decision making - often marginalising those already in the most vulnerable populations.

Looking for CPI inflation data for African countries? See our resource here.

The upshot of all this is simple, though. As more financial crises loom and African citizens again feel a disproportionate burden of geopolitical events, cost of living increases cannot be measured by any one tool or number. We’re making it easier for journalists to compare official numbers between countries and over time, but like every other data story, the human impact of inflation is more important to capture than the somewhat arbitrary numbers. Put people first in your storytelling. Please.

If you missed part one in this series, you’ll find it here. This is part two and part three presents an interactive tool to compare 14 years of inflation data on the continent. We’ll be publishing another way of looking at inflation in Africa in part four of this series next week. Sign up to our newsletter or follow us on Twitter or Facebook to be the first to get it when it lands.

Photo credit: Food market in Ikire, Nigeria, CC International Institute of Tropical Agriculture