CPI basket revamp on the cards, announces Manuel

“Since 2000, the measure of price trends that we have used for inflation targeting purposed has been CPIX.

“The target excluded mortgage repayments from the inflation measure because of the direct impact of monetary policy on these household expenses,” said Finance Minister Trevor Manuel, Tuesday.

Inadequate measuring

Delivering the Mid-Term Budget Policy Statement (MTBPS) in Parliament, the minister explained that interest on loans was not an adequate measure of the cost of housing.

So in line with the international best practice, Statistics South Africa will shortly replace the mortgage component of the consumer price index with owners rent.

The inflation measure for policy purposes will now revert to the full consumer price index for major urban areas, he said.

Asked if inflation would drop when the new basket is brought into effect, Investment Solutions Senior Economist Chris Hart believed that the inflation will drop between 1 to 3%.

“Due to high prices, the weaker Rand is skewing the picture, something which we may find an upside down surprise,” Hart told BuaNews.

Tony Twine, Senior Economist at Econometrix said the inflation target band applied to CPIX inflation which is a total basket of consumer goods with mortgage bond interests.

He said it is selected because it combats inflation and acts as a separating tool (between interest rates and inflation) from the target band.

Homeowner relief

Twine believed that the CPI basket, which is to be replaced by a component of the CPI with "owners' equivalent rent" will bring a relief on homeowners.

“With Minister's (Manuel) predictions, this will imply a decrease in inflation early next year when interest rate hikes ease during the second quarter of 2009,” Twine told BuaNews.

Hart, however, said the change in the new basket would remain the same.

“Interest rates are really too high and there are no signs that they will be cut soon. I have a feeling that inflation will return to the 3 to 6% early 2010,” he said.

The economists did not believe that this change would affect the next Monetary Policy Committee meeting.

Inflation drop?

Economists are currently speculating that with the reweighed and rebased CPI basket, inflation could dip as much as 2%.

“The target band for inflation, [however], remains 3 to 6% and we expect that CPI will fall into the target band in the third quarter of 2009,” the minister said.

South Africa's inflationary cycle began in June 2006 and has brought with it increased food, fuel and energy prices, with the poor having to bare the brunt of these increases.

Inflation topped 13.6% in August 2008 as a result of high food and fuel prices, but interest rates were luckily left unchanged by the Reserve Bank's Monetary Policy Committee (MPC).

Easing price impact

Manuel highlighted that government has taken several steps to mitigate the impact of higher food prices on the poor, and income support for the poor, therefore, remains one of the fastest growing categories of public expenditure.

“Moderation of inflation in South Africa must remain a central policy objective, particularly as we seek to expand investment and job creation under conditions of heightened business uncertainty,” the minister highlighted.

Article published courtesy of BuaNews