An­other bas­ket case

Mea­sur­ing in­fla­tion is con­tentious and ex­pen­sive

Finweek English Edition - - Insight - BRUCE WHIT­FIELD

ECON­O­MISTS HAVE WEL­COMED plans by Statis­tics South Africa (Stats SA) to more reg­u­larly ad­just the bas­ket of items it uses to mea­sure in­fla­tion. Stats SA plans to in­tro­duce a new CPI weight­ing ev­ery three years – as op­posed to the cur­rent five-year cy­cle – in an ef­fort to make its data less volatile and more re­li­able. Econ­o­mists say an in­ter­nally held am­bi­tion to in­tro­duce a bian­nual reweight­ing would serve lit­tle pur­pose and the agency should rather fo­cus its en­ergy on en­sur­ing the seam­less in­tro­duc­tion of a three-year mea­sure­ment.

Mea­sur­ing in­fla­tion is a con­tentious is­sue – and ex­pen­sive. The last sur­vey of price move­ments of 400 prod­ucts in the CPI bas­ket and house­hold spend­ing pat­terns cost R150m. Stats SA was strongly crit­i­cised in mid-2008, when de­spite strong pri­vate sec­tor pres­sure it de­clined to pub­lish es­ti­mates of the im­pact on in­fla­tion of its new CPI bas­ket, which was al­ready 18 months over­due.

How­ever, now that it has a method­ol­ogy more in line with SA’s de­vel­oped nation trad­ing part­ners, it’s hop­ing to avoid con­tro­versy. It’s plan­ning to in­tro­duce the new CPI bas­ket by Jan­uary 2014 – five years af­ter the last one – and then is­sue new weight­ings ev­ery three years af­ter that. But should its work be com­pleted on time, the agency isn’t rul­ing out pub­li­ca­tion 12 months ear­lier – in Jan­uary 2013.

In­vestec As­set Man­age­ment, which had pre­vi­ously pointed out a fun­da­men­tal er­ror in the rental com­po­nent of the then CPIX mea­sure­ment, urged Stats SA to re­lease data on the new CPI weight­ings sooner than the agency in­tended. It led to a fu­ri­ous de­bate on the com­po­nents of the in­fla­tion bas­ket and how of­ten it should be con­sid­ered. At the time in­fla­tion was run­ning hard and the in­tro­duc­tion of the new in­fla­tion bas­ket was ex­pected to sig­nif­i­cantly mit­i­gate the mar­ket view on cost pres­sures in the econ­omy and would give the SA Re­serve Bank more room to move in terms of in­ter­est rates in a con­tract­ing econ­omy. Stats SA stuck to its guns.

The most re­cent changes to the CPI bas­ket were im­ple­mented at the start of 2009: ul­ti­mately two years later than in­tended, be­cause of the scale of the project un­der­taken to de­ter­mine changes to the con­sumer econ­omy in the pre­vi­ous decade.

“The last in­fla­tion weight­ings were done dur­ing a boom,” says Pa­trick Kelly, ex­ec­u­tive man­ager of CPI at Stats SA. “The more fre­quently we can re­fresh the weights, the more ac­cu­rately we can re­flect the ex­pen­di­ture pat­terns of the av­er­age con­sumer.”

“It’s a good idea,” says joint head of fixed in­come at In­vestec As­set Man­age­ment An­dré Roux, high­light­ing the ef­fect rapidly ris­ing elec­tric­ity prices will have on ma­jor com­po­nents of the in­fla­tion bas­ket. “If you don’t reweight then the im­pact of the di­ver­sion is am­pli­fied.”

Roux is also cog­nisant of the im­pact of over­stat­ing in­fla­tion. It was Roux’s col­league John Stop­ford who, in 2003, pointed out the er­ror in the rental com­po­nent of CPIX lead­ing to a correction in the in­fla­tion num­ber; and it was their team at the fore­front of crit­i­cism of the way in which Stats SA man­aged the tran­si­tion from CPIX to CPI.

“The three-year gap is sen­si­ble,” says Roux, “as it doesn’t take the same sort of ex­ten­sive ex­er­cise that had to be em­barked on last time.”

AN­DRÉ ROUX

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