17 July 2008
editorial
Johannesburg — INVESTEC Asset Management has created quite a stir in local debt and money markets. Government bonds rallied in response to its report claiming inflation is overstated by two percentage points, and that local interest rates should be lower than they are now.
Money markets also moved to price in a reduced chance that the Reserve Bank will tighten monetary policy again at its next meeting next month.
In an aggressively marketed "media release" based on data published on July 1, Investec Asset Management said Statistics SA (Stats SA) had made a big error in calculating inflation, just as it did five years ago.
Markets reacted immediately, partly because it was the same institution which correctly pointed out in 2003 that official inflation was overstated by 1,9 percentage points, in an error stemming from the way in which rent prices were measured.
But this time around, things are very different. Stats SA has carried out a regular five-year revamp of its consumer price indices in line with international practice and according to a clearly planned and well-publicised schedule. It has gone to great lengths to tell people what it is doing, why it is doing it, and what the implications are - ie that SA's main inflation rate is likely to be lower when the new indices are published next year.
That is mainly because the weighting for food - which is one of the main factors driving global prices up - will be cut to 16,3% in the basket of goods measured by CPIX from 25,6% now. But there are other factors that could offset this change - the weighting for service prices, which are just starting to climb, will increase to 38,3% from 33,8%.
Also, a significant portion of the new basket of goods comprises products and services which have not been monitored before, such as prices for taxis, restaurants, sporting events and funerals. This means that the annual inflation rates for these items cannot be calculated now - there are no previous prices for comparison.
It is impossible to say with any certainty how much lower SA's targeted inflation rate will be next year, although many analysts have speculated that it could be up to two percentage points lower. Some analysts said the overall effect would be neutral for inflation, while others predicted it would take even longer for CPIX to fall back inside its official 3%-6% target range. That gauge has breached its target for 14 months running, rising by 10,9% in May, and is expected to climb further this year as new electricity price hikes feed into the economy.
It is rather odd that Investec Asset Management took two weeks longer than anyone else to come to its conclusions. It is even odder that the authors of the report saw fit to ring reporters and pressure them to publish their "explosive" findings immediately. Nobody in SA does that - not the government, the Reserve Bank or Stats SA. The institution does have a point in saying that it takes Stats SA too long to process its five-year survey - the last time, it also took two years. But in that case, why not speak up sooner?
Stats SA took great pains to check and double-check the data because of the big changes in spending patterns which were revealed, especially when it came to food. And in any case, it is the rate of price changes that matters for interest rates, rather than the level.
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