Helmke Sartorius von Bach | Jul 1, 2020 | 0
Inflation – one size does not fit all
Most employers and trade unions look at the Consumer Price Index as the measure of year on year inflation as defined by the NSA (Namibia Statistics Agency).
“A CPI measures the changes in the cost of a fixed and representative basket of goods and services. This involves weighting together aggregated prices for different categories of goods and services so that each takes an appropriate share to reflect the budgets of the households covered by the index. The inflation figures from the CPI represent a weighted average of price changes.”
The problem with this approach in a country with our economic demographics, is rather obvious. The basket of goods for a low income household (assume income between N$2,000 and N$5,000 per month) will be very different from the basket of a middle or upper income household. The CPI does not allow for such differentiation as it averages the so called “representative” basket.
For example, one can assume that the basket of a low income household will have a significantly higher share of food expenditure, alcohol expenditure and transport expenditure than a middle or higher income household. In other words the inflation faced by the lower income family will be much closer to the food, alcohol and transport inflation rather than the averaged CPI.
The argument states that the various income categories are actually facing different inflation as for example food inflation is well above the average CPI measured inflation. NSA reported that the Food inflation for April 2013-2014 was 8.9% and Transport was 9.4% while the CPI for April 2013-2014 was 5.9%. Therefore it can be expected that the inflation facing a low income family will be significantly higher than the CPI and the inflation that faces the middle or higher income categories [will be less.]
The fact that our society has such an acute income disparity should make the difference in inflation between categories even higher as the spending patterns of the various categories differ greatly unlike in developed world economies.
Many companies already differentiate their annual increases among the various pay scales. Low income labourers often receive higher percentage increases than the higher paid admin or management staff. However, it is important to note that the rationale behind such differentiation is not the differentiation of inflation between categories, but rather the employer’s effort towards narrowing the gap. Unfortunately this is often eroded by the inflation difference that is facing the particular household category.
As a solution one can recommend that the NSA formulate such household categories and publish regular measurements of inflation for these categories when the CPI is published. This will allow employers to better structure and differentiate their annual inflationary increases and hopefully assist in addressing the existing income disparity.