Average Inflation Rate Calculation

A comparison between the investment return derived from a residential property investment and the average inflation rate during the period of investment is useful to determine whether an investment provides a higher return than the inflation rate.

When this calculation is performed, it is important to use the correct inflation rate. We recommend that the rebased Consumer Price Index (CPI) is used for this purpose. This inflation rate is also used by the South African Reserve Bank as a target inflation rate when fiscal policies are determined.

The CPI is calculated by Statistics South Africa by measuring the price movement in numerous products and services on a monthly basis. For the purposes of this calculation, specific weights are assigned to categories of expenditure based on consumer spending statistics. The different types of expenditure are grouped together in a basket and the high volume spending items carry the most weight and therefore has the most material impact on the calculated index.

The CPI index is calculated from a base year which carries a value of 100 and all previous and subsequent periods are compared against the base year and expressed as a number in relation to the base index year value of 100. Prices of products and services generally increase over time and periods before the base year therefore generally have values of less than 100, while periods subsequent to the base year generally have values greater than 100.

The latest rebasing of the CPI index occurred in January 2009 and was applied to 2008 prices. These prices are therefore used as the base prices for the index - the average index value for the entire 2008 year will therefore be represented by an index value of 100.

The CPI index enables us to calculate the average inflation rate between any two periods included in the index. This calculation can be performed by simply using the start date index value as a present value, the end date index value as the future value and the number of years (or months) in between as the period in a financial calculation. The periods used will determine the type of rate calculated - if annual periods are entered, an annual inflation rate will be the result of the calculation.

Refer to the Excel example included on this page (click the link on the top of the page to download). In this example, we have used the CPI index values from January 2000 to January 2009 to calculate the average inflation rate for each year in between as well as the cumulative inflation rate during this period. Note that an estimate was used to calculate the January 2010 rate.

As you can see from the example, the Excel RATE function was used in these calculations. This functionality makes it very simple to calculate the inflation rate between any two periods. You will also note from the cumulative formula that it is always based on the same Present Value which is the start date of the calculated date range.

The CPI Index is released by Stats SA around the 25th of each month and published on their web site. Alternatively, you can visit the economic data section of this web site for the CPI and other useful economic indicators (only for periods after January 1997).

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