Considerable confusion has been raised recently by those, including Investec, who have contended that the South African inflation rate is being exaggerated by as much as two percent. It is argued that this overstatement of the ‘real’ position has cost South African consumers a great deal of money in inflated interest rates which have been the response of the Reserve Bank to the official inflation figures.

I find this all very interesting. When it became clear to the public, as opposed to the specialists in the financial sector, that Stats SA was to revise the weightings in the basket of costs that make up the CPI, cynics viewed this as an official manipulation of the figures so that the inflationary situation did not appear to be so bad after all. Yet, the reality is that Stats SA has been working on this ‘refreshment’ of the CPI formula for some time and the review is being done in terms of its own objective to re-establish the validity of the inflation index every five years.

As we know from the media coverage accorded to the monthly announcement of the CPI, this is a critical economic indicator. Not only does it guide the Reserve Bank, but agreements with unions regarding salaries and escalation provisions in leases and other contracts are also directed by the official rate of inflation. To the person in the street, however, whose pocket detects the rate of inflation long before an official figure is released, it has far less real meaning. Thus, whether the current rate is the ‘official’ 10,9% or the ‘real’ 8,9% makes not the slightest difference, except to our salary and wage increases, perhaps. All that we know is that prices of food and fuel have escalated beyond reason and are costing us more per month that whatever the inflation figure is claimed to be. Indeed, the CPI for food stood at 17% in May, while the price of petrol increased by a whopping 35% since the previous May. These increases considered, it is understandable that there should be some consumer scepticism about the re-weighting exercise which will see the relative significance of food prices lowered because, it is claimed, people spend a lower percentage of their income on food than they did before.

The refreshed CPI will come into operation in January next year. Expert statisticians will provide the means for linking the current CPI to the new index which, as I understand it, will be set at 100 at the beginning of 2009. When this occurs, this will be the ‘official’ CPI, just as the current figure of 10,9% is the only ‘official’ inflation figure at present. The pre-emptive calculations by Investec, and others perhaps, have prompted an interesting debate and some doubt, perhaps unfairly, about Stats SA’s efficiency. It is claimed that the new weightings should have been implemented sooner so that the effects of the recent food and other price increases would have been reduced. Consequently, the Monetary Policy Committee of the Reserve Bank would not have been swayed to increase interest rates.

I cannot buy this. Stats SA acknowledges that the ‘real’ CPI is lower than the ‘official’ figure. That is the very reason that the revision to the basket of prices is being effected. Financial experts know this, too, and Investec has made its knowledge very public. Is it being suggested that the members of the Monetary Policy Committee remain, among the specialists, oblivious to the overstatement? Surely not. If no one in the Committee said at the last meeting: “Hang on a bit, inflation is not quite as high as the official figure indicates,” then the whole lot of them should be fired.

Andrew Layman: PCB CEO

This article appeared in The Mercury on the 23 July 2008