Inflation rate under lockdown comes at the price of accuracy
This week the monetary policy committee (MPC) of the Reserve Bank meets to consider the monetary policy stance and the repo rate. One of the most important economic indicators for its decision is the rate of inflation. The primary indicator used to measure inflation is the consumer price index (CPI) published by Stats SA. Changes in the CPI are used as basis for the Bank’s inflation target policy.
SA has an inflation target of 3%-6% per annum. If the rate of inflation accelerates with a danger of exceeding 6% for a sustained period, the Bank will increase interest rates. Conversely, if the rate drops towards or below 3% on a sustained basis, interest rates will decline.
The inflation rate also has other important applications. It is used as a deflator of consumer expenditure in the country’s national accounts and other economic data. Also, salary adjustments and other contractual agreements are often based on the inflation rate. This wide use of the CPI as the rate of inflation implies that its accuracy is of the utmost importance.
For instance, if the CPI and the rate of inflation for 2018 were adjusted retrospectively, all salary and contractual increases based on the rate of inflation for 2018 would have to be adjusted. Moreover, all subsequent changes would also have to be readjusted as the base measured for 2018 would have changed.
Stats SA calculates the CPI by measuring the cost of purchasing a fixed basket of consumer goods and services of constant quality and similar characteristics. The products in the basket are selected as representative of an average household’s expenditure during a specific period.
Stats SA calculates the CPI on the basis of the classification of individual consumption by purpose (Coicop) for goods and services. Coicop is the international standard for classifying household expenditure. The 12 main Coicop categories are: food and nonalcoholic beverages; alcoholic beverages and tobacco; clothing and footwear; housing and utilities; household contents; equipment and maintenance; health; transport; communication; recreation and culture; education; restaurants and hotels; and miscellaneous goods and services, including insurance and financial services.
Stats SA records the prices of 412 products and services to calculate the CPI. In addition to the overall rate of inflation, it calculates the CPI for different income groups and for each of the nine provinces. A number of other indices and rates of inflation for particular groups, for instance pensioners, are also calculated.
Given the impact of the lockdown on the economy, it raises the question whether a true reflection of price levels, price changes and the rate of inflation can be calculated accurately since March. The next publication of CPI data is for April, but it is unlikely to be a reliable indicator of inflationary pressures in the economy.
The fixed basket used as the basis of the CPI calculation will not be representative of consumer spending since the start of the lockdown. In the initial lockdown, only essential consumer purchases were allowed. Besides the well-known ban on sales of tobacco and alcoholic beverages, consumer expenditure on many services, semidurables and durable goods was prohibited, affecting about 30% of consumer expenditure used to weight the index.
THE FIXED BASKET USED AS THE BASIS OF THE CPI CALCULATION WILL NOT BE REPRESENTATIVE OF SPENDING
In addition, the prices of many goods that are based on field samples by Stats SA staff will not be available, adding to the uncertainty of current inflationary trends. Should the prices of prohibited items bought during the shutdown be included in the index, since they can account for significant consumer spending? It is no secret that some of these items, particularly alcohol and tobacco, continued to trade illegally during this period.
However, as illegal services and products such as prostitution and narcotics are excluded from the CPI, it is unthinkable that Stats SA would consider prices emerging from illegal trade in items such as tobacco and alcohol to calculate the CPI and therefore the rate of inflation.
It is unclear on which basis an accurate CPI figure and inflation rate can be calculated during a national lockdown when there is a ban on the sale of certain items included in the calculation of the CPI.
Unfortunately, the aforesaid situation introduces doubt over the accuracy and credibility of the inflation figures. The distortion of the CPI is likely to continue until the government’s lockdown policy ends.
Rossouw is interim head of the Wits Business School; Holland MD of PriceMetrics; and Nikani an executive director of the Takeover Regulation Panel.