The contraversial revision of inflation figures will not lead to a drop in administered prices, nor necessarily result in the haemorrhaging of foreign funds from South Africa’s financial markets in the short term. But it will widen the gap between employers and workers over pay. This is the view of economist Tony Twine, after Statistics SA moved to correct one of the most embarrassing errors in its history.
Last Friday the statistical agency revised inflation figures from last January. The 2002 annual average was restated as 9,2%, down from 10,1%. The March CPIX (inflation minus mortgage rates) figure was revised from 11,2% to 9,3%. CPIX currently stands at 8,5% while headline inflation CPI is 12,5%.
The revision has prompted a rethink on a range of fronts. Electricity, telephone and postal tariffs adjustments are all based on inflation, as are wage increases. The revision also has implications for real interest rates — the difference between the nominal or stated interest rate and inflation.
High real interest rates have been cited as a major reason that foreign currency has flooded into local markets, beefing up the rand’s strength over the past six to 12 months.
Twine does not expect Telkom, Eskom or the Post Office to review its tariff increases of the past year
”This is simply because the tariffs inform revenue targets, which in turn inform planned expenditure,” he says. Revising tariffs based on revised inflation figures will, therefore, jeopardise planned spending.
On wage negotiations, Twine expects the gap between employers and organised labour to increase.
”Employers will use new figures to argue for a lower increase than they thought they would have to offer a month ago,” he says, while ”unions [will] stick to their original demands.”
On the financial markets, South Africa has appeared to offer relatively attractive returns due to higher interest rates and a huge differential between the inflation and interest rates, or real interest rate. Twine reckons that even with a series of interest rate cuts, expected to start next month, and a lower inflation rate, South Africa is still ”a magnet for hot money”. This is because South Africa’s real interest rates are still high compared to the United States and Europe.
The expected rate cut and lower inflation have already led to some funds being withdrawn from local markets, causing the rand to weaken to its current levels of about R8 to the dollar. Twine still expects the currency to settle at between R8,50 and R9,50 in the short term.
Statistics SA blames the error on an acute shortage of resources. The agency operates on a budget of about R250-million a year.
Hilary Southall, chairperson of the Statistics Council, says the agency has an acute shortage of skills at all levels which is compounded by the fact that there are few suitably trained statisticians and economists in the country.
”So, although more money would be nice, it will not solve all the problems on its own,” she says.
Southall says the council is an advisory body to both Statistics SA and the Minister of Finance Trevor Manuel, although ”our advice is not always followed”.
She is liaising with Manuel to draw up terms of reference for a review of the agency.