/ 20 August 2008

Manuel mulls switch to CPI targeting

The Financial Mail reported on Thursday that South Africa could switch to targeting CPI and not CPIX inflation.

“It will be CPI, but the modalities and details still have to be worked out. I can’t say whether the target range will change but we believe that a range of 3% to 6% still offers a lot of room to benefit economic growth,” Finance Minister Trevor Manuel was quoted as saying.

Chief economist from Investment Solutions, Chris Hart, said on Thursday that the proposed switch to CPI made sense and he did not foresee any problems.

He said the more important question was whether or not the target range was changed.

“The household cost change will not be a direct interest-rate cost. It is done in a number of countries around the world. It makes sense on one level,” he said.

He explained that it would no longer be an interest-rate cost, but a household cost, for example by including implied rentals, or the cost of renting, rather than buying a house.

Brait chief economist Colen Garrow was quoted as saying on August 7 that the country’s inflation target bands may be ratcheted a little higher after the elections next year to meet the needs of economic expansion while developing infrastructure.

“I think the inflation target could change. It is what the big discussion between government and the Congress of South African Trade Unions is all about,” said Garrow.

The increase in South Africa’s consumer price index excluding mortgage rate changes (CPIX) for metro and other areas, which is currently used by the South African Reserve Bank for its inflation target, was up 11,6% year-on-year in June from 10,9% y/y in May.

This was the fifteenth month running that CPIX has been above the 6% upper target limit.

Headline consumer prices — the 12-month rate of change in the consumer price index (CPI) for metropolitan areas — was up 12,2% y/y in June from an 11,7% y/y increase in May.

The core inflation rate, which excludes volatile foods, municipal rates and monetary policy changes, was up 12% y/y in June from 11% y/y in May.

The re-weighting and rebasing of the CPI basket is set to take effect from January next year.

The two-year delay by Statistics South Africa in implementing the rebasing and reweighting of the inflation basket is having serious implications for the economy, said Investec Asset Management on July 15.

“Calculations by Investec Asset Management have shown that the real inflation rate in the economy is probably far lower than the official inflation number, echoing the predicament in 2003 when CPIX inflation was found to have been overstated by 1,9%,” it said.

“Official CPIX for May was 10,9%, but had the numbers been rebased and reweighted last year as they should have been, our calculations show actual CPIX of 8,7%,” said André Roux, head of fixed income at Investec. – I-Net Bridge