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.