Investec says that South Africa's real inflation rate has been overstated, however the implementation of Statistics South Africa's new CPI calculation system will help inflation fall into the target band by mid 2009.
André Roux, head of fixed income at Investec Asset Management, says that the miscalculation is the result of a two-year delay by Statistics South Africa in introducing revised methodology for the construction of the Consumer Price Index.
"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%," he said.
"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. If the rebasing and reweighting had been implemented, the real peak in inflation would have been around 10%."
The comment from Investec followed Stats SA's announcement regarding changes to the CPI that will come into effect in 2009, when the CPI will be reweighted and the CPI basket updated. A new expenditures classification system, Classification of Individual Consumption by Purpose (COICOP), will be introduced, replacing the International Trade Classification (ITC) currently in use.
Stats SA has admitted that international best practice is to reweight and rebase consumer price indices at least every five years, however the national statistics office delayed the process in an effort to ensure that the new system stood up to international standards - a process that required intensive analysis and research.
Speaking to Bloomberg.com, Director General of Stats SA Rashad Cassim, defended the national office saying, "We didn't delay the reweighting of the index. We're paying the price for being thorough.''
The overstating of the interest rate has had a serious impact on monetary policy as well as other pricing decisions such as wage negotiations, long-term contracts and retail prices. However there is no question, says Roux, that reweighting and rebasing in 2009 will improve the outlook for inflation in the longer term.
"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," he said.
The most explicit upweighting is in vehicles, which will increase from 5% to 11%. Food items, in contrast, will be downweighted by about 6%. 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.
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."
Roux says there is no doubt that the revisions to CPIX will provide a more accurate picture of inflation in the economy.
"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.
"We can expect rate cuts far earlier than might have seemed possible before StatsSA released the details of the revision," he added.
