4 July 2008
editorial
Johannesburg — LONG-AWAITED changes to the baskets of goods and services that Statistics SA uses to calculate inflation have sparked a flurry of excited research from the country's analyst community.
Most believe the revisions to the components of consumer price indices will more accurately reflect the spending patterns of South Africans, whose incomes rose by an estimated 33% between 2000 and 2005. But that is where consensus appears to end.
Stats SA has pointed out that a big downward revision to the weighting for food - the main inflation culprit - is likely to lower the level of inflation when the new indices take effect next year.
The weighting for food will fall to 16,26% from 25,66% in the CPIX gauge monitored by the Reserve Bank for interest rate decisions. This is significant because the annual rise in CPIX has breached its 3%-6% target for 14 months in a row - buoyed largely by global food prices, which have doubled since 2003.
But Stats SA says the changes will not necessarily alter the direction of inflation - which is what matters for interest rates. The Bank also says it is too early to factor the new weightings into its forecasts, as nobody knows what will happen to the prices of oil and food, the other inflation dragons.
However, analysts are forming opinions on what the changes may mean for CPIX, and interest rates.
Many think smaller weightings for food and electricity prices - which are about to rise sharply - will lower the expected annual rise in CPIX by one to two percentage points next year. A big increase in the weighting for vehicle prices, now falling, could also help to lower measured inflation.
If the Bank reaches the same conclusions fairly quickly, it may not raise interest rates again this year, as local markets expect it to do. Even if there is another rate hike, some analysts think the changes mean interest rates may fall sooner than expected next year, as CPIX retreats towards its target range a bit more quickly.
The measure rose 10,9% in May - a five-year peak - and is expected to climb further this year, breaking a previous record of 11,3% and nearing 13%. But if the new weightings are applied now, the peak would be below 12%.
People outside SA's financial community are somewhat cynical, suspecting political manipulation prompted the revisions. Nothing could be further from the truth.
Consumer price weightings are revised every five years in line with international best practice, and Stats SA bases the changes on data gleaned from its last five-year income and expenditure survey.
The new baskets make a great deal of sense in that they include taxi fares, funeral costs and hotel and restaurant prices for the first time. They also replace prices for VHS videos and cassette tapes with prices for DVDs and CDs.
Inflation figures for this year will not be revised - but data are being collected so that next year's price change can be compared with like-for-like goods this year.
That will give the new data a continuity which was lacking when Stats SA revised producer price indices in January this year.
In any case, some analysts say the revisions will keep inflation higher for longer, pushing interest rate cuts further into the future.
They base their view on a higher weighting for service inflation - which is just starting to respond to broader price pressure. That will rise to 38,3% from 33,8%.
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Now we can bring down inflation simply by replacing rapidly increasing items with slowly increasing items great is,nt it