Gold Magazine March - April 2013, Issue 24 | Page 88

inflation

{MONEY}

Same but
Different
HOW DOES YOUR PERSONAL MEASURE OF INFLATION
COMPARE WITH THE GOVERNMENT’S?
By Glen Richards

ccording to the Oxford English Dictionary, “Inflation” is
‘a general increase in prices’.
However, a perhaps more
contemplative definition from
the same dictionary is ‘a fall in the purchasing
value of money’. But while one meaning refers to the government’s measure of the rise in
the cost of goods and services, it is also a measure that is more specific to each individual’s
spending and saving habits.
The most common measure of inflation we
see is the Consumer Price Index (CPI). The
Statistical Service of Cyprus compiles the CPI
by measuring the price change in a basket of
goods and services acquired, used by, or paid
for by households in all major towns across
the island. The CPI measure quite rightly
includes food & non-alcoholic drinks, clothing, footwear, utilities, and so on.
The goods that actually make up the basket
come from the Household Budget Survey
carried out by the same Statistical Service.
You may be surprised to learn that the last
Household Budget Survey was carried out in
2009...
And here, in my opinion, lie some worries
for the average citizen when considering inflation and whether or not his/her hard-earned
savings are seeing a “fall in the purchasing
value of money”.
The World Development Indicators Database, compiled by The World Bank, puts Cyprus’ position in the table of GNP per capita at
41 out of 214. I don’t think it’s any secret that
the ‘good years’ across many industries in the
not-too-distant past had a big impact: many
people in Cyprus became affluent. This can be

seen by the number of larger-than-life houses
that continue to be built, the expensive restaurants at every turn, and the €100,000+ cars we
pass every day. Some would argue that, when
the good years return, and with the welcome
addition of Cyprus’ newly-found national
natural gas resource, more will become rich
and the rich will become even richer.
I would suggest that it’s a fair assumption
that, as we have acquired more wealth, our
spending habits have changed. Even without
a general increase in wealth across the population, one could argue that the goods and
services we buy now are very different to those
we bought in 2009, when the last Household
Budget Survey was conducted.
This is something we should all take int o account when considering our personal finances:
Are they keeping up with inflation as a government measure or are they keeping up with
inflation as it relates to us individually?
Towards the end of 2012, Forbes magazine
published its latest Cost of Living Extremely
Well Index. Whilst the Index is based on US
prices, Forbes identifies an upward trend in the
prices of luxury goods outweighing the CPI
index by a long way. If your ‘personal basket’,
for example, consists of expenditure on spas,
lawyers, private schooling or a dozen bespoke
cotton shirts, the price rises you will have seen
will be 15%, 6%, 4%, and 5% respectively –
far more than the Government’s CPI measure
of 1.8% (Jan ’13 – Statistical Service of Cyprus).
Of course, rises in fuel surcharges on flights,
prices in upmarket restaurants, and even the
price we pay for coffee in a popular café are all
reminders that some things seem to continually increase in price at a rate that feels much

faster than anything else. Of course, the Forbes
study cannot be true of every country, nor
can it accurately reflect the rises in this type
of expenditure in Cyprus, but it can serve as a
reminder that we each have our own personal
rate of inflation, and that our own ‘personal
basket’ can in fact be very different from the
basket constructed from a survey carried out
in 2009.
So what can we do to fight this neverending battle against inflation? Many people are
of the opinion nowadays that the banks only
ever take action to help themselves – I would
say that this has been the case for many years
but that public awareness of it has risen since
the fault lines in different national economies
began to appear. So it’s important for us all to
make our own informed, educated decisions
about where we put our hard-earned savings
and investments, and to take advice if and
when appropriate, instead of simply accepting the best our bank has to offer. Even at an
attractive savings rate of 2%, with the effects
of the special defence contribution (SDC) on
interest in Cyprus (15%) and using only the
government’s measure of inflation (1.8%), the
end result is in fact a loss of -0.1%. The true
result over the course of a year could vary (and
the loss could increase) in line with changes in
the CPI level, especially considering the effects
of the increase in VAT; in addition, the January inflation figures used above may understate
the true level, since they cover the festive sales
period, which means that some goods in the
basket were temporarily cheaper than they
otherwise would have been.
When we use CPI as a basis for measuring
how well our savings and investments are doing, it’s important to remember that the CPI
measure can be a long way off our own personal rate of inflation, as our individual baskets all
vary. There is merit in taking the time to consider this when dealing with our own personal
finances, and taking advice where applicable.
Some advisory companies specialize in this
area, have many years of experience, and can
often have solutions that may not be available
from your local bank or advisors.

info: Glen Richards Cert PFS, Cert CII (MP) is Managing Partner at Pembridge International Ltd and has been providing analysis & financial services for over a decade

- both in the UK and internationally. He has been based in Cyprus and assisting clients in Cyprus for the past 4 years. He is a Member of the Personal Finance
Society, the Chartered Institute of Insurance, and CIFSA. www.pemrbidge-international.com.
88 Gold THE INTERNATIONAL INVESTMENT, FINANCE & PROFESSIONAL SERVICES MAGAZINE OF CYPRUS

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