Friday, December 1, 2023

Investec Asset Management says South Africa inflation exaggerated

Investec Asset Management has come out strongly against Statistics South Africa (StatsSA) accusing the institution of misinformation and distortion over the inflation rate in that country.

Investec, one of South Africa’s biggest companies, said StasSA, which is tasked with the forensic calculations of the country’s inflation rate, has lately overestimated the country’s inflation level, unleashing wrong readings to the South African monetary institutions.

“The two-year delay by StatsSA in implementing the rebasing and reweighing of the inflation basket is having serious implications for the economy. Calculations by Investec Asset Management have shown that the real inflation rate in the economy is probably far lower than the official inflation number,” Investec Asset Management said in a statement.

The head of fixed income at Investec Asset Management, Andre Roux, said: “Official CPIX for May was 10.9 percent, but had the numbers been rebased and reweighed last year as they should have been, our calculations show actual CPIX of 8.7 percent.
“The official peak in inflation will be in the order of 13 percent, once the impact of electricity tariff adjustments is fully incorporated. Once again, if the rebasing and reweighing had been implemented, the real peak in inflation would have been around 10 percent.”

Roux said, as a result of that omission, the implications for the South African economy are drastic.
“There is no question that the monetary policy has been based on the official published inflation rate. Every single forecast by the Reserve Bank has been based on these inflated numbers. Rate increases this year would have been less likely had the MPC (monetary policy committee) been aware that the real inflation number in South Africa was significantly lower.”

“In our view, interest rates would have been at least 1-2 percent lower than the current levels.”
But it is not only from a monetary point of view that the official numbers matter.

“Every single pricing decision rests on the inflation rate, whether it is wage negotiations, long term contracts or the price increases retailers push through to the consumer,” he argues, urging the MPC to take note of the distortions to the official inflation numbers.

“They should not wait until January for the new official numbers. Monetary policy going forward should be based on the true inflation rate.”

The Investec revelations come in the light of another serious overstatement by the same firm, StatsSA, in 2003, uncovered by another head of fixed income at Investec Management, John Stopford, who discovered that CPIX had been overstated by 1.9 percent.
Stopford found mistakes in the way that the rental category had been handled. Not only had StatsSA overestimated the inflation rate of rentals, but its de facto weighing was growing thereby compounding the effect.

“Five years on from their last major failure to calculate inflation correctly, it looks as though StatsSA have done it again. They are well aware that substitution effects and rising incomes can materially change consumer spending patterns over time. That is why, as they admit, international best practice is to reweight and rebase consumer price indices at least every five years,” he noted, adding that, “By not doing so last year, five years after the previous recalculation, we estimate that CPIX will now peak about 3 percent points higher than it should have done if calculated correctly.”

Naturally, countries rebase and reweight their inflation every five years. In the normal course of events, StatsSA would have implemented the reweighting and rebasing in 2007, but it seems, they were so intent on improving their methodology that the reweighting and rebasing will come into effect in January next year.”
“In their efforts to ensure that the reweighting and rebasing stood up to international standards, they lost sight of the impact that these delays would have,” said Roux. “The country has been labouring under the illusion that inflation is much higher than the true number.”

The renowned Investec Asset Management, with headquarters in London and Cape Town, calls on StatsSA to provide an estimate of the extent to which the official inflation rate is being overestimated.

“They need to come clean now. Technically, it should be possible for them to calculate a rebased and reweighted number for the June release. It might not be perfect, but there is no point in waiting until next year to splice in the new data quietly. The consequences of further delays are too great,” Roux decried.

He warned that the current high official number has generated a momentum of its own, which means higher inflation going forward. “We should not allow this to continue for another day.”

All these shortcomings notwithstanding, Investec Asset Management is adamant there would be light at the end of the tunnel.

“Despite the problems caused by the delay, in the long term, the reweighting and rebasing will improve the outlook for inflation. The consequences of the revision to the inflation calculation are 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 average.”
The company maintains that the revisions to CPIX will provide a more accurate picture of inflation in the economy.

“The integrity with which StatsSA collected the numbers and did the calculations cannot be called into question-it is just a shame that the delay has led to such a distortion in the official inflation rate.”
It said the most explicit upweighting is in vehicles, which will increase from 5 percent to 11 percent.

“People have spent a lot more money on vehicles but vehicles have been flat. We expect this trend to continue. If anything, second car prices, which will feature more prominently in the new inflation number, are falling away sharply,” Roux added.
Food items, in contrast, will be downweighted by 6 percent.

“This is to be expected. The growth in the economy means that the food has become a smaller item in the average consumer basket. Its contribution to total inflation will therefore shrink.”
One big surprise is that electricity will be downweighted from about 4 percent to about 2 percent.
“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 on overall inflation.”
Investec Asset Management believes the outlook for inflation has changed dramatically.

“We now expect inflation to fall into the target band by the middle of next year and to be the mid-point of the band by the end of next year, with some uncertainty on how the oil price behaves,” Roux said.


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