CBS clarifies cost of living and inflation |21 June 2018

The Central Bank of Seychelles has clarified the term inflation which is often confused with the cost of living although there is a strong link between the two.

The bank has put things into perspective, starting with some definitions.

The cost of living is the amount of money required to maintain a given living standard. Essentially, it is how much money is generally required to cover basic living expenses such as food, clothing, transport, rent, etc.

The cost of living will vary from person to person since it is influenced by an individual’s life choices. Therefore, even taking into consideration generally accepted basic needs such as food, there are strong elements of preferences that will influence how a person’s disposable income is spent.

Let us say John resides on Praslin and is required to spend R8,000 of his monthly income to maintain a standard of living of his choice. This implies that John’s cost of living on Praslin is R8,000.

Normally, the cost of living will vary in different countries or regions and from the above example, John’s cost of living is likely to be different if he was to move from Praslin to somewhere on Mahé.

Moreover, a person with the same disposable income residing in the same district, even in the same household, may have a different cost of living. This would again reflect a difference in choices and therefore, on what he/she spends his/her monthly income on, consistent with his/her lifestyle.

For example, while both Mary and Jane buy washing powder to wash their clothes, Mary’s preference for the Ariel brand will likely mean that she has a higher cost of living, as opposed to Jane, who prefers the Depex brand which is relatively cheaper.

Inflation, on the other hand, is a measure of the changes in the general level of prices of goods and services that are purchased by consumers. Therefore, it can be said that inflation affects the purchasing power of individuals or households.

In Seychelles, inflation is measured based on changes in the Consumer Price Index (CPI). The current index is constructed using the prices of the goods and services that were purchased by an average household in the country during 2013.

The Central Bank obtained this information from a survey conducted by the National Bureau of Statistics (NBS), the agency that also compiles and publishes inflation data on a monthly basis.

The latest statistics published by NBS show that in March 2018, the price of goods and services purchased by an average household in Seychelles was 4.7% more expensive compared to when the same items were purchased in March 2017. It should be noted that this does not mean all residents of Seychelles will have experienced a 4.7% rise in prices over that period: the 4.7% increase is the average for all items that feature in the CPI as obtained from the 2013 Survey. It is very unlikely that the basket of goods and services used to construct the CPI will fully reflect the expenditure of each one of us individually. As such, most people will not feel that the 4.7% increase in prices represents his/her own personal experience.

A sustained increase in the general price level directly translates into a reduction in the amount of goods and services that can be purchased. This can be the result of a number of factors and include, for example, when demand for goods and/or services exceed supply or when cost of production goes up due to factors such as higher wages, taxes, etc. In Seychelles, as a country that imports more than what it exports, otherwise termed a net importer, significant contributors to inflation are the price of imported commodities and movements in exchange rates.

To further illustrate the difference between the two terms, consider this:

A rate of inflation of 3.5% means that the same amount of money can buy 3.5% less of the same amount of goods and services than before. Hence, from a cost of living perspective, assuming these goods and services were what the individual purchases on a monthly basis to maintain a given standard of living, then, the individual is expected to experience an increase in the cost of living if no change in preference or spending pattern is made.

By contrast, a person will experience an increase in the cost of living if he/she changes the goods and services purchased, by buying items that are more expensive than what he/she was originally consuming even if the rate of inflation remains at 0.0%.

To note therefore, while the changes in price levels (or inflation) happen for various reasons that are beyond our control, there is an extent that an individual can influence his/her cost of living. There is no right or wrong choice when it comes to preferences but it rather serves as an indication of what individuals perceive to be more important. A rise in income allows households to increase expenditure, adopt preferences for more expensive goods or even build up savings.

As income grows and/or the economy develops, people’s preferences change, particularly in terms of the share of income that is required to be spent on a specific item. For example, nowadays, the cost of internet and/or cable TV will have more importance to an average household than was the case ten years ago.

Let’s sum things up.

The standard of living tends to be relative to earnings and our individual choices and preferences, while inflation is directly linked with changes in the prices of goods and services, that are beyond our individual control. While they are different concepts they both contribute to the rise – or decline – in our standard of living.