Inflation Measurement

First published 25 February 2016

The way inflation is measured causes some people to jump to incorrect conclusions. The headline published figure is a comparison of a current price index with that of a year ago, eg Jan 2016 to Jan 2015. When the inflation rate jumps from 5.2 to 6.2%, as happened, it is easy to say that inflation is really taking off. However of equal importance as to what happened between Dec 2015 and Jan 2016 is what happened between Dec 2014 and Jan 2015 because that element of the formula is dropping out. Thus when the petrol price dropped steeply in Jan 2015 it caused the new base month of the current calculation to be abnormally low with the inevitable effect on the inflation rate. This is referred to by economists as a base effect. It is thus important to also look at the month on month movement of prices. Yet this also has a downside in that some prices are not measured every month. Incidentally I see that Old Mutual economist Rian le Roux attributed a significant part of the January figure to the sharp increase in the price of lottery tickets

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