National Consumer Price Inflation
Widening the Wage Gap
South Africa’s inflation rate is calculated by measuring the change in the Consumer Price Index (CPI) from the month in question to the same month of the previous year. The Consumer Price Index is calculated by monitoring the change in the price of a particular basket of goods and services from the base year to the current date. The weightings used for the goods in this basket are determined by Statistics South Africa.
There are five expenditure groups which have differing baskets of goods based on what portion of their expenditure is used to purchase these goods and services. The CPIs of these expenditure groups are used to calculate the national CPI, however they do not receive an equal weighting as indicated in Table 1.
Table 1: CPI Weighting by Expenditure Group
*Source: Statistics South Africa
Table 1 indicates that the four lowest expenditure groups account for half of the weighting that the Very High expenditure group accounts for. According to the 21st Century Increase Report (2016), CPI is the most commonly used measure when determining what percentage to give employees as an annual salary increase (albeit that it is often not the only factor used). Table 2 indicates the percentage of organisations which use CPI when determining annual increases.
Table 2: Percentage of Organisations which use CPI to determine Increases by Occupational Level
*Source: 21st Century Increase Report
It seems logical that CPI should be the most commonly used metric in determining annual salary increases, however, is national CPI equally applicable to all employees? The annual CPI for each expenditure group is summarised in Table 3.
Table 3: CPI by Expenditure Group (2009 – 2016)
*Source: Statistics South Africa
Given that the lower income groups face higher inflation rates relative to the higher income groups, the question to be asked is, should the goods and services that the higher income groups spend their income on influence the increases of the lower expenditure groups when they face a higher inflation rate? The lowest four expenditure groups all faced a higher average inflation rate than the average national inflation rate between 2009 and 2016.
This means that if all employees received the national CPI inflation rate as their salary increase the only expenditure group that would have had an average increase in real income over this period of time is the Very High expenditure group. A real increase in income is the difference between the salary increase received and the inflation rate faced by the employee.
Although CPI inflation is the most commonly used metric in determining annual increases, it is in most cases not the only metric used. This is why according to the 21st Century Increase Report median salaries have experienced real increases in thirteen of the last fifteen years. Figure 4 illustrates the average annual real salary increase for each expenditure group.
Figure 4: Average Annual Increase in Real Income by Expenditure Group (2009 – 2016)
*Source: Statistics South Africa and 21st Century Increase Report
Figure 4 indicates that the average increase in real salaries between 2009 and 2016 has increased the Wage Gap (in real terms) as the rich experience larger increases in their real income than the poor. The table also indicates that as one moves into the higher expenditure groups, they receive a larger real increase in their salary. The reason for this is that items such as food, rental of accommodation, electricity and public transport have all increased at an average annual rate higher than the average national CPI inflation rate between 2009 and 2016. These items make up a larger portion of the lower expenditure groups’ expenses than that of the higher expenditure groups’ expenses.
The lowest income group receiving the lowest increases in their real incomes has been a contributor to the movement which is striving for a minimum wage to be imposed. Although that is a separate topic to this, it has been driven by employees feeling that they are becoming increasingly worse off as their expenses rise at a rate which is higher than their income.
Using national CPI inflation as an input to determining annual salary increases and applying it to all employees within an organisation is not an accurate means of determining the increase in each employee’s living expenses. Making use of differentiated consumer inflation rates (perhaps by occupational level) would be a step in the right direction when determining the true impact of inflation on various groups of employees.
If this methodology is applied correctly, an equalisation increasing salaries at the lower occupational levels will take place (and possibly even a correction) which would at a minimum arrest the Wage Gap and perhaps even begin to reduce it depending on how these differentiated methodologies are applied.
B.Com (Hons) Economics
B.Sc Chem. Eng., MBA – Leadership & Sustainability