Publications
Partners
Cape Town – The drastic drop in the petrol price over the past four months has not had any effect on the price of food, according to an inflation expert.
Riyadh Bhyat, an actuary who started The Inflation Factory (TIF) after completing a masters degree at Oxford University, uses real-time CPI (consumer price index) with a 99% correlation to the officially published results to determine live trends.
“We measure inflation in real time,” he told Fin24.
“We do this by tracking the prices of hundreds of thousands of goods that are sold online every single day and mirroring the calculations that Stats SA performs each month. It’s a quintessential big-data approach to the financial markets.”
Effect of petrol on CPI
Bhyat said the effect of petrol on the published CPI can be understood as a function of the size of petrol as a component of the CPI basket (the larger it is the more of an effect it has); the price change of petrol (the larger the price change the more of an effect it has); and the secondary effects that the petrol price change may have on other categories within the CPI basket.
The visualisation below shows every category that is in the CPI as a bubble, with the size of the bubble proportional to the weight that the category has in the CPI basket.
Source: All graphs by The Inflation Factory.
“Petrol constitutes 5.68% of the CPI basket, meaning that Stats SA has determined that overall the country consumes roughly 6% of their budgets on petrol,” said Bhyat. “This is relatively large, being the third largest single category in the CPI after rentals for houses and health insurance.”
Comparing petrol and the CPI
In the graph below the price index of petrol during 2014 is compared with the Real Time CPI calculated by The Inflation Factory, (which has a 99% correlation to the officially published CPI).
“It is clear that petrol has decreased significantly in 2014, but how much does this decrease in price affect the CPI? As an example, the most recent petrol price decrease on 7 January was roughly 10%, bringing the price index down from 92% to 82%.”
“The effect of this change on CPI can be found by multiplying this 10% decrease by the roughly 6% weight that petrol has in the CPI to arrive at a 0.6% decrease in the CPI for the month of February (the month in which the January petrol cut will be reflected).”
“Considering that CPI has been roughly increasing at 0.4% per month, this single price decrease from petrol is enough to decrease CPI by 0.2% over a single month,” he said.
The year-on-year CPI rate that this change implies is calculated by The Inflation Factory to be 4.6% in February.
“It is worth putting the petrol price decrease in the context of a longer-time frame, to understand how significant the price has been,” he said.
The graph below shows the petrol price against The Inflation Factory’s real time CPI starting from January 2013.
“Although the recent price decreases are still significant they are much more benign considering the increases which took place in 2013,” he said.
Knock-on effect on food
The last effect is to understand whether the petrol price decrease has any knock-on effects for other categories, such as food, which requires significant transport costs.
The graph below shows the petrol price against TIF’s real time food price index which tracks more than a hundred thousand different food items.
“It is clear that food prices have not decreased in line with the petrol price,” said Bhyat. “The correlation between food and petrol over 2014 was -45%, indicating a weak negative relationship.”
“Even when comparing the petrol price with individual food categories, as shown below, there is no obvious pass through of this saving to consumers since petrol began decreasing in September 2014.”
* Do you have a question for Bhyat? Ask us now.
