CPI has its place… That place is not the boardroom

As the end of the year approaches, we as business owners are once again faced with tough decisions about price increases for the new year. Every year, the dread appears around the same time as the Christmas decorations begin appearing in the malls and, for me at least, renewed frustration at the futility of using Consumer Price Index (CPI) as any kind of indicator of where inflation is at for business in the country.

According to Statistics South Africa, “The inflation rate is the change in the CPI for all items of the relevant month of the current year compared with the CPI for all items of the same month in the previous year expressed as a percentage.”

The clue should be in the name – it is a consumer price index – not a business price index. CPI is indeed a very good indication of the average South African consumer and household expense changes, though it is worth looking at who qualifies as the average South African in this context. According to the last census statistics in 2011, the average South African is a black 25 year old woman living in Gauteng, who attended but did not complete high school and has no tertiary education and is employed, but does not have much disposable income.

That said, the average professional person owning or managing or debating price changes for the companies we service, does not qualify as the average South African; and furthermore what we as a business spend our money on is nowhere near similar to what our average South African household spends their money on.

There are 12 categories that are monitored monthly in order to compile the CPI basket and those 12 categories are also weighted to reflect the percentage of monthly expenditure on them. Give a little thought as to which of these are relevant to your business in substantial weighting – Food and non-alcoholic beverages; alcoholic beverages and tobacco; clothing and footwear; housing and utilities; household content and services; health; transport; communication; recreation and culture; education; restaurants and hotels and “miscellaneous goods and services”.

As a business, maybe 25% of the items are relevant to our costs and even then, the weighting they are given in a consumer context is not in line with the weighting they have in a business context. A quick glance at electricity and communications which are weighted as low expenditures to the average consumer (4.1% and 2.6% respectively) clearly illustrates this disparity, as they are generally a significant percentage of a business’s monthly expenditure.

Not to mention the glaring absence of salaries, that in the service industry could be anywhere up to 85% of a business’s expenses. There are not many highly skilled employees that will stay with a company for a salary increase that is in line with or less than that of inflation and, in most cases the expected increase is far higher. Inflation for 2013 is currently sitting at 6% (as of September’s CPI announcement); if your expenses are comprised of even 50% salaries and your staff expects a minimum of a 10% increase at the end of the year, there is no chance your cost increase can be 6% - your business could simply not sustain itself.

The bottom line is that although CPI certainly has its place; that place is not at the boardroom table. When considering your business’s price increases, you need to consider your own categories and weightings and not rely on something that is irrelevant to your expenditures. If you are confronted by resistance from customers citing CPI, take the time to explain why those numbers aren’t relevant to your business and the services you provide.

Note: CPI & Census information was garnered from the latest published documents on the Statistics SA website www.statssa.gov.za