PROPERTY REALITY
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Download our example of an annual inflation rate calculation [ Microsoft Excel .xls file 25KB ]
The average inflation rate is one of the investment return benchmarks that are frequently used when analyzing the actual investment return of a residential property investment. By comparing this rate to the actual investment return that is achieved, the investor can determine whether the property investment provides a return that exceeds the average inflation rate. When performing this comparison, it is therefore imperative to use the correct inflation rate. We recommend that the Consumer Price Index (CPI) is used for this purpose. This inflation rate is used by the South African Reserve Bank as a target inflation rate in determining monetary policy.
The CPI is calculated by Statistics South Africa by measuring the price movement of numerous products and services on a monthly basis. For the purpose of this calculation, pre-determined weights are assigned to various products and service categories based on consumer spending trends. The different types of expenditure are grouped together in a basket and the high volume products and services carry the most weight in the basket and therefore have the most significant impact on the index that is calculated.
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 prices 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 that are less than 100, while periods after the base year generally have values that are greater than 100.
The CPI index values enable users to calculate the average inflation rate between any two monthly periods that are 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 a future value and the number of years (or months) in between the two periods as the period in a financial calculation. The period that is used determines the basis of the rate that is calculated. For example: if annual periods are used, an annual inflation rate is calculated and if monthly periods are used, a monthly inflation rate is calculated.
Download the Microsoft Excel based template that is included at the top of this page in order to view a detailed calculation of an average annual inflation rate. The template contains the CPI index values from January 2009 to January 2017. These index values are used to calculate the average inflation rate for each annual period as well as the cumulative inflation rate at the end of each annual period. The Excel RATE financial function was used in order to calculate the average inflation rates and the only difference between the annual and cumulative inflation rates is that the cumulative rates are all based on a present value that is equal to the index value of the first annual period that is included in the calculations. The CPI Index is released by Statistics South Africa around the 25th of each month and the CPI data can be obtained from the Stats SA website.