An important point to note is that the basket of goods and services recorded by the authorities or statistical agencies may not represent an individual’s basket, therefore the headline inflation rate or the average change of prices in an economy may over or understate the individual’s own particular rate of inflation.
There is unfortunately no perfect way to measure inflation and as with all forms of statistics, an ‘average’ rate can hide a multitude of different rates of inflation for individual items within the inflation basket.
Changing consumer habits may also mean that particular items may drop out of ‘official’ inflation baskets, but that does not mean that consumers have stopped buying those items, it just means they have become less popular.
It is also an unfortunate fact that inflation tends to have more of an impact on the poorer members of society, as they tend to spend more (in percentage terms) of their income on food, fuel and essentials, rather than discretionary items.
Food and fuel are unfortunately very volatile in terms of their price behaviour and this is why many statistical agencies produce core inflation measures that exclude the volatile food and energy components.
If we are entering a period of stagflation – where central banks seek to combat periods of higher inflation with higher short-term interest rates, but in doing so ultimately reduce the prospects for economic growth – policymakers could conceivably be forced towards an informal (some would say reluctant) accommodation of higher inflation.
An asset class with some degree of certainty in terms of its real rate of return can offer a refuge in what is a highly uncertain environment.
Thomas Wells is manager of the Sanlam Global Inflation-Linked Bond fund
