Have you ever heard your grandmother reminisce about the time when a loaf of bread cost just 20 cents? Or have you wondered whether it’s right for a government to boast about how much it’s now spending on education compared to a decade ago?
Fact-checkers often have to compare the change in the value of prices, salaries and budgets between years. Sometimes, these figures have already been adjusted to account for inflation – the increase in the price of goods and services over time. This saves us from doing the maths. But other times they have not.
Why should you pay any attention to inflation? And how can you check how far your money will take you or if the cost of living has really gone up, as many people often say?
In this guide, we explain what inflation is, how to adjust for it and why this matters.
How is inflation measured?
Inflation is commonly measured by setting a basket of goods and services that a typical person would buy. Statistics South Africa, the country’s national statistical agency, includes 412 goods and services in its basket. They include food, clothing, housing and transport.
An increase in the cost of the basket over time gives you an inflation rate. When the cost decreases, it gives you a deflation rate.
Inflation means people have to pay more for those goods and services, even though no extra items have been added to the basket. Deflation, which is relatively rare, means people will pay less for the basket.
What are the effects of inflation?
Inflation reduces the value of money. People who are saving money or those who have fixed incomes are most affected by it.
If you have R100 tucked under your mattress from 10 years ago, you would now only be able to buy a handful of the goods and services you could have bought in 2010. This is because the value of the money has decreased since then.
Even if the money was sitting in a savings account, the interest you earned from the bank would need to be enough to make up for the value that has been lost to inflation. This also applies to people saving for a pension or retirement.
Similarly, people with fixed incomes find that the amount they can buy decreases over time.
How to adjust figures for inflation
To adjust for inflation, you need to know the consumer price index (CPI) in a given year. The CPI measures the change in the price of a basket of goods and services.
Using CPI values lets you calculate the value of something – like a salary or budget – in a specific year.
The formula is:
Let’s say a person earned R5,000 a month in 2008. Prices have increased since then. So what would that person need to earn in 2018 to be able to buy the same goods and services?
To answer this, we need the CPI values for 2008 and 2018.
The calculation shows that a person earning R5,000 a month in 2008 would need to earn R8,474.84 in 2018 to keep up with the rising cost of goods and services.
Using this formula, you can also calculate the value of an item – for example, a car – in a specific month of a specific year.
If you bought a car for R60,000 in November 2005, how much money would you have needed to buy the same car in November 2019?
Using the respective CPI values, we calculated that a car that cost R60,000 in November 2005 would have cost R132,233 in November 2019.
Why do figures need to be adjusted?
When figures are not adjusted for inflation, it leads to distortions. We can’t accurately compare the change in figures over time.
For example, the graph below shows the increase in the price of a 700g loaf of white bread in South Africa from 2009 to 2019. The orange line shows the price without adjusting for inflation – the nominal price. The blue line shows the price adjusted for inflation, or the real price.
The nominal figures appear to show that the price of bread increased 76% over the decade. But adjusting these figures for inflation, using the CPI values from April 2009 to April 2019, gives us a more accurate picture of the price increase over the years. The real figures show that the actual cost of bread rose 5.9% in 10 years.
Africa Check has come across this problem in claims about economic growth. In January 2019, South African president Cyril Ramaphosa claimed that the country’s economy had tripled in size over the previous 25 years.
But he was referring to the nominal increase in the size of the economy, which showed that gross domestic product (GDP) grew 2.5 times from US$139.7 billion in 1994 to $349.4 billion in 2017. But the rise in value included inflation.
When we adjusted the figures for inflation, we found that the country’s economy actually only grew 1.9 times from $225.6 billion in 1994 to $426.7 billion in 2017.
Similarly, in October 2019, Nigerian communications minister Dr Isa Pantami claimed that information and communications technology (ICT) contributed 13.9% to Nigeria’s GDP while oil and gas contributed 8.8%.
ICT does contribute more than oil and gas, but Pantami quoted ICT’s share in nominal GDP, and the oil and gas sector’s share in real GDP. Experts said it would be better to compare the sectors using real GDP as it gives a better indication of economic growth.
Try out a few of your own calculations using these links.
- Statistics South Africa
- Historical CPI values (1980 – 2020)
- South African Reserve Bank
- Inflation calculator (1960 – 2020)
- Kenya National Bureau of Statistics
- CPI values and inflation rates (2004 – 2019)
- Central Bank of Kenya
© Copyright Africa Check 2020. Read our republishing guidelines. You may reproduce this piece or content from it for the purpose of reporting and/or discussing news and current events. This is subject to: Crediting Africa Check in the byline, keeping all hyperlinks to the sources used and adding this sentence at the end of your publication: “This report was written by Africa Check, a non-partisan fact-checking organisation. View the original piece on their website", with a link back to this page.