Another basket case
Measuring inflation is contentious and expensive
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.”