Investec says StatsSA overstated inflation - again
Investec 15 Jul 2008 19:00
Actual CPIX is 8,7% not the 10,9% says group's head of fixed income. The two-year delay by Statistics South Africa (StatsSA) in implementing the rebasing and reweighting of the inflation basket is having serious implications for the economy. Calculations by Investec Asset Management have shown that the real inflation rate in the economy is probably far lower than the official inflation number. "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 Asset Management. "The official peak in inflation in September will be in the order of 13%, once the impact of the electricity tariff adjustments is fully incorporated. Once again, if the rebasing and reweighting had been implemented, the real peak in inflation would have been around 10%."
These calculations are based on the methodology that StatsSA will use in its five-yearly revision of the inflation statistics, the details of which were released on the 1st of the July.
The implications for the economy are drastic, Roux said. "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 MPC been aware that the real inflation number in South Africa was significantly lower."
While he doesn't call into question the deterioration in the inflation outlook, it is the scale of the deterioration that has determined how restrictive monetary policy has been. "In our view, interest rates would have been at least 1-2% lower than current levels."
But it is not only from a monetary policy point of view that the official numbers matter. "Every single pricing decision rests on the inflation rate, whether it is wage negotiations, long-term contracts or the price increases retailers push through to the consumer."
Roux urged the MPC to take note of the distortions to the official inflation numbers. "They should not wait until January for the new official numbers. Monetary policy going forward should be based on the true inflation rate."
These findings echo 2003, when 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 - not only had StatsSA overestimated the inflation rate of rentals, but its de facto weighting was growing, thereby compounding the effect.
"Five years on from their last major failure to calculate inflation correctly, it looks as though StatsSA may have done it again. They are well aware that substitution effects and rising incomes can materially change consumer spending patterns over time. That is why, as they admit, international best practice is to reweight and rebase consumer price indices at least every five years. By not doing so last year, five years after the previous recalculation, we estimate that CPIX will now peak about 3 percentage points higher this year than it should have done if calculated correctly.
"Once again, StatsSA have caused inflation to be overstated at its peak, with negative consequences for monetary policy, inflation expectations and price-setting in the economy," Stopford said.
As a norm, countries rebase and reweight their inflation basket every five years. In 2002, StatsSA published reweighted and rebased inflation numbers based on 2000 weightings. "In the normal course of events, StatsSA would have implemented the reweighting and rebasing in 2007, but, it seems, they were so intent on improving their methodology, that the reweighting and rebasing will only come into effect in January next year.
"In their efforts to ensure that the reweighting and rebasing stood up to international standards, they lost sight of the impact that these delays would have. The country has been labouring under the illusion that inflation is much higher than the true number," Roux said.
He called on Stats SA to provide an estimate of the extent to which the official inflation rate is being overstated. "They need to come clean now. Technically, it should be possible for them to calculate a rebased and reweighted number in time for the June release. It might not be perfect, but there is no point in waiting until next year to splice in the new data quietly. The consequences of further delays are too great," he said.
He warned that the current high official number has generated a momentum of its own, which means higher inflation going forward. "We should not allow this to continue for another day!"
Light at the end of the tunnel
Despite the problems caused by the delay, in the longer term there is no question that the reweighting and rebasing will improve the outlook for inflation, Roux said. "The consequence of the revision to the inflation calculation is that it will upweight those goods and services in the overall inflation number for which inflation has been below average, and will downweight goods for which inflation has been and will continue to be above average."
Roux says there is no doubt that the revisions to CPIX will provide a more accurate picture of inflation in the economy. "The integrity with which StatsSA collected the numbers and did the calculations cannot be called into question - it is just a shame that the delay has led to such a distortion in the official inflation rate."
The most explicit upweighting is in vehicles, which will increase from 5% to 11%. "People have spent a lot more money on vehicles, but vehicle prices have been flat. We expect this trend to continue. If anything, second hand car prices, which will feature more prominently in the new inflation number, are falling away sharply," Roux said.
Food items, in contrast, will be downweighted by about 6%. "This is to be expected. The growth in the economy means that food has become a smaller item in the average consumer basket. Its contribution to total inflation will therefore shrink.
One big surprise is that electricity will be downweighted from about 4% to about 2%. "Fortunately, this means that Eskom's massive tariff increases are going to have less of an impact on the aggregate inflation numbers going forward," Roux said.
The rebasing itself will also have a big impact. This revision will have the effect of raising the contribution of items for which inflation has been low. This includes clothing, furniture, telecoms equipment and recreational items, such as TV sets. "We expect the prices of these items to remain reasonably well behaved and to be below average. This will have a positive impact on the inflation outlook for the foreseeable future," he said.
Petrol will be rebased downwards, which Roux also views as encouraging. "While crude oil prices continue to rise, the downbasing of petrol will curb its negative impact on overall inflation."
Investec Asset Management believes the outlook for inflation has changed dramatically. "We now expect inflation to fall into the target band by the middle of next year and to be at the mid-point of the band by the end of next year, with some uncertainty depending on how the oil price behaves," Roux said.
"Whatever the reaction of the MPC to the current dilemma, the room for manoeuvre into next year will be a lot more. This means we can expect rate cuts far earlier than might have seemed possible before StatsSA released the details of the revision," he concluded.
