New CPI basket ushers in lower inflation figure

The old inflation indicator, the Consumer Price Index, which excluded interest on mortgage bonds (CPIX) has now been replaced by the CPI which excludes owners equivalent rent.

Basket composition

The new CPI basket can be considered an up-to-date reflection of current prices in South Africa and includes inflation on things such as minibus taxi fares, restaurant and take-away meals, funeral costs, hotel rooms, sports event tickets, DVD players and internet costs.

Some items which have been removed from the CPI basket of goods include caravans and boats, musical instruments, VHS recorders and VHS cassettes.

Stats SA Statistician General Pali Lehohla said at a media briefing in Pretoria on Tuesday, that the 2005/06 Income Expenditure Survey (IES) was the main source of information used in deciding on the composition of the new basket.

“By 2004 we announced we will be reviewing all our indices and from 2005 we started a lot of work on price statistics. The journey doesn't end here though and we are already working on the Producer Price Index (PPI),” Lehohla said.

Three quarters cut

CPI Manager at Stats SA Patrick Kelly explained that the number of goods included in the CPI basket has decreased significantly from 1,200 products to 403 products.

The new basket of products is, however, more in line with international norms and best practices, and Stats SA aims to collect about 100,000 actual prices per month.

The rebasing of the CPI involves the process of resetting the actual indices to a common starting point. The rebasing and reweighting of the basket is done to make the CPI more relevant to South African consumers, Kelly said.

Kelly highlighted that even though the new headline CPI figure only takes into account price changes for goods in urban areas, it is still the most reliable measure of inflation.

CPI predictions

The new CPI figure, used by the South African Reserve Bank as a measure of inflation, brings down inflation by just under a percent, which is less than the 2 - 3% economists and the National Treasury predicted.

January 2009's CPI figure is due to be released at the end of February 2009 and is likely to come down even further.

Fuel price cuts and a general downward trend in the inflationary environment, evidenced by the 50 basis point cut in interest rates in December 2008, is likely to bring greater sway for a 100 basis point cut in the repo rate when the Monetary Policy Committee (MPC) meet on Wednesday and Thursday.

Economist at Econometrix Treasury Management (ETM), Russell Lamberti told BuaNews recently that he believes the MPC, despite a drop in inflation, are more likely to cut rates by 50 basis points than by a full 100 basis points.

"I'm going for a 50 basis point cut, but it is a difficult choice...the MPC can't be seen to be chasing down inflation and there is a need for predictability and stability.

"Inflation is coming down but the rand is still vulnerable," he said.

Idling GDP

The global recession which has stagnated South Africa's Gross Domestic Product (GDP) growth to less than 1%, brought about by a decline for South Africa's commodities, led to the Reserve Bank granting some relief to financially hard-pressed consumer by reducing the repo rate by 0.5% in December 2009.

Putting more money into the pockets of South African consumer by cutting interest rates allows for that extra money to be spent on goods and services which in turns help the domestic economy stay on its feet.

Despite the lowering inflation figure, it is still outside the Reserve Bank's inflation target band of 3 - 6%, but is expected to return to within the measure by the third quarter of 2009.

Article published courtesy of BuaNews