What CPI inflation figures do and don’t tell us
Last month, CPI inflation rose by a modest 0.3% from December, with the annual rate of inflation easing to 5.4% from 5.7% in December. This is below market expectations and within inflation targeting range. Although some reports have suggested that the ne
The new re-based and re-weighted CPI index was introduced by Statistics South Africa in order to update the calculation to better reflect the way in which South Africans spend their money on. Does this mean the previous basket was in some sense inadequate?
Not so, says Jeff Gable, managing principal, head of Africa non-equity research at Absa Capital. “The previous methodology was not flawed. It reflects expenditure at a certain point in time. The previous basket was calculated based on the expenditure patterns in 2005/6. This was towards the end of a huge economic boom – banks were lending, the housing market was robust, people were buying big-ticket consumer durables,” explains Gable. “Spending patterns have changed since then. There is no ‘perfect’ basket but it’s not correct to say that the previous basket was an inappropriate measure, it’s just that this new basket, which uses expenditure patterns from 2011 is more relevant today.”
Inflation risk still high
What the latest statistics tell us is that inflation risk is still high. Food and non-alcoholic beverages were among the main contributors to inflation last month. Although global food inflation eased a little, we can still expect the annual rate of increase to drift higher here, to around 10% in July and August, largely due to base effects, says Stanlib economist Kevin Lings.
Although petrol inflation fell by 1.2% last month, reflecting the 15c/l decrease in the fuel price at the beginning of January, petrol has gone up by 41c/l this month and there’s a massive 86c/l average daily under-recovery on the fuel price (the result of a higher oil price). We can probably see an increase in March, which will add meaningfully to the March inflation reading, says Lings.
Core inflation (CPI less food, fuel and electricity) was down to 4.7% from 4.9% in December and service inflation eased to 5.9% from 6.0% in December, suggesting that CPI is well within inflation targeting. Risks to inflation remain on the upside, thanks to currency, petrol, electricity and wage issues. But Lings believes the Reserve Bank will leave the interest-rate unchanged, since the upward bias isn’t sufficient to argue for a hike.
Editor’s thoughts:
Statistics South Africa has come in for some criticism over the relevance of its CPI basket. It ignores the effect that monetary policy has on asset prices – what about asset price inflation? ETM Analytics’ Chris Becker says that unemployed and low-income earners are experiencing higher consumer price inflation than the official rate, which lowers their real income; in addition, asset price inflationas measured by the JSE All Share Index is running at 16% year on year, which means that if they don’t own assets their ability to ever own and accumulate them diminishes. They are therefore not protected against Rand weaknessand the effects of price inflation. While the well-off can generally protect themselves against the effects of supply-side inflation, low-income earners cannot do so, and the Reserve Bank cannot address this with inflation targeting.In fact, Becker argues, inflation targeting is the root cause of growing income inequality.Gable says high administered prices – those prices determined by sellers – remain a huge burden on the local economy. While electricity and petrol prices exert upward pressure on inflation, consumers must bear an ongoing heavy burden. Let us have your thoughts below or e-mail [email protected].
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