wage gap

Why does Headline CPI
prejudice salary increases?

Most employed South Africans receive an annual salary increase which is meant to enable an employee to keep up with the cost of living.

The most commonly known inflation figure is the headline consumer price index (CPI) inflation rate as this is the figure quoted in the media when Statistics South Africa (Stats SA) releases their monthly inflation figures.

 

Despite this figure reflecting the state of inflation in the economy as a whole, it has very little relevance to most individuals in their personal capacity. This is because the share of their individual income that they spend on goods and services differs in quantum and distribution from that of the average economy (which is what headline consumer price inflation measures).

 

A more granular approach to determining the true inflation rate faced by individuals is to consult the inflation rate per expenditure decile. This means which 10 percent of spend the individual falls in from the lowest (1) to the highest (10) earners across the whole economy. Table 1 illustrates how different income groups spend their income on goods and services in different proportions.

Table 1: Expenditure by Income Group

On average between 2009 and 2018, the poorer income groups have faced a higher inflation rate than the richer income groups. Table 1 illustrates how the relative importance of food impacts a poor individual’s spending more than a rich individual – the poor spend 48% of their income on food and non-alcoholic beverages whilst the rich only spend 11%. 2016 is a prime example of this as food and non-alcoholic beverages increased by 10.5%, which contributed to the lowest earners facing an inflation rate of 7,6%.

The effect of this is that if a standardised (identical) increase was given to all occupational levels in the organisation, then the wage gap would increase in real terms over this period. Table 2 illustrates the inflation rate faced by each expenditure decile between 2009 and 2018.

Table 2: Inflation Rate by Expenditure Decile

Table 2 illustrates that with the exception of 2010, 2017 and 2018, the inflation rate faced by each expenditure decile has been regressive i.e. the higher the earning group the lower the headline CPI. This means that the poorest individuals have generally faced the highest instance of inflation. As a result, expenditure deciles 1 to 8 (the lowest eight expenditure deciles) faced an inflation rate above that of headline consumer price inflation in every year (except 2010, 2017 and 2018). The final column indicates the average inflation rate per annum between 2009 and 2018.

 

If headline consumer price inflation was universally given as the annual salary increase to all employees then the only two expenditure deciles that would be better off in real terms are the two highest expenditure deciles (9 and 10). These two deciles would have gained 0.1% per annum in real terms between 2009 and 2018.

 

Conversely, Expenditure deciles 1 and 2 would have lost 0.2% and 0.3% (respectively) per annum in real terms between 2009 and 2018.

Conclusion

 

The information contained within Tables 1 and 2 suggests that using headline CPI in isolation when determining annual increases can have adverse effects on the wage gap.

 

Furthermore, the importance of food and non-alcoholic beverages in the basket of goods and services which represent the lowest expenditure deciles suggests that this inflation rate cannot be ignored when determining the true inflation rate faced by the lowest earning employees.

 

Inflation should not be the sole determinant of an annual increase. However if it is to be used as an input factor, one should recognise the difference between headline CPI and the real inflation rate faced by individuals.

Written by:

 

Bryden Morton
Executive Director
B.Com (Hons) Economics
bmorton@21century.co.za

 

Chris Blair
CEO
B.Sc Chem. Eng., MBA – Leadership & Sustainability
cblair@21century.co.za

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