Analysts and economists have raised concerns about Statistics South Africa’s reweighting of the inflation index. This week Investec Asset Management raised concerns over the delay in the implementation of the new inflation basket which was meant to take place last year, but will only be implemented in January next year.
The delay in updating the inflation basket has meant that inflation has been overstated by 2%. This has serious consequences for monetary policy. Andre Roux, head of fixed investment at Investec Asset Management, said that the official peak in inflation in September will be around 13%, once the impact of the electricity tariff adjustments is fully incorporated.
If the rebasing and reweighting had been implemented timeously, the real peak in inflation would have been about 10%. Roux said the implications for the economy are drastic.
“There is no question that monetary policy has been based on the official published inflation rate. Every single forecast by the Reserve Bank has been based on these inflated numbers. Rate increases this year would have been less likely had the Monetary Policy Committee been aware that the real inflation number in South Africa was significantly lower.”
Gary Quinn, portfolio manager for Prudential Portfolio Managers, said there needs to be more regular adjustments for the substitution of goods using the methodology of the United States. For example, the price of chicken in South Africa has fallen, so consumers would naturally switch from beef to chicken.
By changing the basket of goods through substitution, the full impact of food increases would not filter through directly to the inflation basket. T-Sec economist Mike Schussler that there are also some anomalies in the new basket which appear counter-intuitive.
For example, the weighting for cars has increased in the index from 5,29% to 11%, yet petrol has decreased from 4,75% to 4% of the inflation basket. Intuitively, few households would agree that expenditure on petrol has declined as a percentage of their household expenditure, given that petrol prices have risen by over 30% this year alone.
Figures from the US show that households are spending more of their income on petrol now than a year ago. Moreover, Schussler said the fact that the stats show people are spending more on cars would suggest they are spending more on petrol.
He also questioned the drop in electricity as a component of the basket from 3,5% to 2%. Official figures show that electricity usage has increased faster than the growth in GDP, one of the reasons cited by Eskom for the power crisis.
Consumers have increased the number of electrical appliances in their homes and would therefore also have increased their net usage of electricity.
The percentage allocated to medical care has also decreased from 5% to 3%, yet Health Minister Manto Tshabalal-Msimang has complained about the spiralling costs of healthcare in the private sector.
Schussler said that while these changes naturally reduce inflation, the timing could not be worse when oil prices start to ease, the relative impact on inflation will be lower.
However, over the past two years when energy and food prices have been spiralling upwards, StatsSA has overstated these categories by not reweighting the basket timeously. This is not the first time StatsSA has been shown to be inaccurate.
In 2003 John Stopford, joint head of fixed income at Investec Asset Management, discovered that CPIX had been overstated by 1,9%. He found mistakes in the way that the rental category had been handled.
Over the next few months StatsSA will be pressed hard by economists to explain why they delayed the implementation of the new basket, and to provide more detail on the change in the description of the goods and services in the basket.