Changes in compilation of local statistics to affect rate decisions
May 14, 2008
By Ethel Hazelhurst
Johannesburg - Key inputs into monetary policy have been affected by changes in the way Statistics SA processes crucial data, according to the Reserve Bank's monetary policy review, released yesterday. It highlighted "significant and immediate" upside risks to inflation if Eskom's demands for additional price increases are met.
In its twice yearly review, the bank referred to changes to both the consumer price index minus mortgage costs (CPIX), the bank's benchmark inflation measure, and the producer price index (PPI), which reflects prices of goods as they leave the farms, factories or mines. These figures form the basis for predictions of future inflation and normally influence the monetary policy committee (MPC) when it decides on the course of interest rates.
The way in which the changes have been introduced were criticised by economists when they were first published.
The review said the double-digit figure for CPIX of 10.1 percent in March was boosted by 0.2 percentage points due to an "upward bias" in the figures. CPIX has breached the ceiling of the bank's 3 percent to 6 percent target range for 12 consecutive months. If the upward bias in March is excluded from the figures, CPIX would have come in marginally under 10 percent.
The bank did not labour the point but the revisions, though necessary, have clearly distorted perceptions. This is at a time when underlying inflation pressure is already high.
The MPC is bound to take this into account when it meets next month to decide whether to hike rates further, after a 4.5 percentage point increase since June 2006, to 11.5 percent last month.
The review said Stats SA would publish a monthly estimate of the extent of the upward bias for the period January to December. The upward bias was 0.17 percentage points in January and 0.18 percentage points in February, it reported.
The effect on perceptions of the CPIX changes was compounded by changes, in January, in the construction of the PPI. PPI inflation shocked the markets when it came in at 11.8 percent in March.
However, the review said: "The nature of these changes means that the new PPI is not completely comparable with its predecessor and needs to be analysed with caution."
A significant change to PPI is the inclusion of the gold price, which was previously excluded from the mining index "in an attempt to avoid its price fluctuations dominating those of other products". The price of gold and other commodities soared last year. Moreover, the share of the mining index has risen from 8.92 percent in the basket of goods measured to 19.41 percent.
The review said a survey of inflation expectations undertaken by the Bureau for Economic Research at the University of Stellenbosch showed a significant increase in inflation expectations. The average projections of financial analysts, businesses and trade unions, "registered the largest increase between consecutive quarters in the survey's eight-year history" - CPIX at 7.8 percent for the current year from the 5.9 percent projection made in the previous quarter.
The bank's central projection on inflation was that CPIX would have peaked at 9.3 percent in the first quarter and it expected CPIX to decline within the target range by the final quarter. This projection took into account the 14.2 percent increase for electricity prices agreed by the National Energy Regulator.
However, there are a number of "upside risks". The most "significant and immediate" is that "Eskom has applied for a revision of the increase for 2008/09 from 14.2 percent to 60 percent and for a further increase of a similar magnitude in the following year".
|
|
