This week Chris Becker and I did some research on price inflation on a Wimpy burger and chips combo meal and the CPI over 41 years.  We found that Wimpy prices are up 11000% since 1972, while the official CPI is only up about 4700%.

This amounts over 41 years to an average annual CPI inflation rate of 9.9% and a burger ‘n chips inflation rate of 12.2%, an average annual difference of 2.3%.  We argue that there is little reason to believe burger ‘n chips inflation should outstrip CPI inflation on a sustained basis.  It is a middle-income consumer good, neither luxury nor necessity, in a highly competitive fast food industry where net profit margins rarely exceed 7%, which is probably lower than overall margins in the SA economy over time.

Yes, strictly speaking the price of any product can outstrip inflation due to real demand factors.  But over 41 years in an industry that if anything has suffered from modern health trends?  I doubt this is the case here.  Nor is it plausible that Wimpy are “ripping us off.”  Wimpy operates in a competitive market where customers are very attuned to relative value for money.  If Wimpy was ripping us off they’d be earning super margins and competitors would have climbed in to whittle those margins away.

It is yet more evidence that CPI under-reports true price inflation.  The startling thing is how just a 2.3% annual difference in price inflation rates amounts to such massive difference over 41 years.  This is the dark side of compounding.  Pensioners on inflation-linked increases?  Sorry for you.  If price inflation is under-reported by about one fifth every year on average, think what this means for your real pension fund returns benchmarked against inflation, or getting CPI+2% wage settlements for 10 years and wondering why life isn’t getting any easier.

I spoke to Bruce Whitfield about this for a few minutes on Radio 702 last night.


About Russell Lamberti

Russell Lamberti is a regular contributor to Mises SA. He is Chief Strategist at ETM Analytics, an Austrian-influenced economic research firm based in Johannesburg. Although he wrties about many topics, you'll most often find him slaying patent and copyright law and exposing the biggest bubble in history: fractional reserve banking.
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  • Sandra

    Russell, interesting read, as usual. Could you possibly go into more factors regarding whether SA is at a normal inflation level relative to other economies ect..and if not, why is it so high?

    • Albert Nelmapius

      Yes Russel, I agree with Sandra that you owe your readers a deeper explanation of why inflation is significant.

      Inflation is caused by the government debasing the currency (“printing money” in layman’s terms). This gives them a source of money to spend on their favorite government projects at the expense of the citizens.

      Each day the value of the circulating currency goes down and down (or saying it another way, the citizen can buy less and less with his salary). Fixed
      income people like pensioners as Russel pointed out are most affected.
      It is a very horrible and hidden tax and unlike income tax and VAT it
      hits the poorest citizens the hardest. They have no way of avoiding it.

      That’s why the government has a vested interest in cooking the books so
      that the official inflation rate is always lower than the real pain the
      citizens experience. I think that is the point Russel was making.

      There is no “normal inflation” The lower the better. Ideally it should be zero.

      It does not help to compare the local inflation with what it is in other
      countries because all countries across the world are doing it simultaneously, (debasing their currencies) which is another way of hiding the truth from the citizens.

      Another rough estimate of inflation or said another way, a rough index of “government pumping” is the stock market.

      Just before the Zimbabwean currency collapsed, their stock market was the
      fastest growing in the world. Just before the recent (2008) economic bubble
      bursting in the USA, the stock market was breaking all records.(and it is
      heading there again because of US policies of Quantitative Easing).

      I read in the news this morning that the South African stock exchange is breaking new records.

      • Russell Lamberti

        Good point about the stock market. Rising stock prices are just inflation in another guise, and usually are a sign of impending economic trouble.

      • http://www.chrislbecker.com/ Chris Becker

        Hey Albert, yes I’ve also written about this Zimbabwe-ification of the JSE before: http://chrislbecker.com/2012/11/09/zimbabwe-ification-of-the-jse/

    • Russell Lamberti

      I will try post something up soon-ish that speaks to this.