Interest rates may drop after stats blunder

Finance Minister Trevor Manuel's formal admission on Monday that inflation figures had been overstated could prompt relief for consumers in the form of lower interest rates when the Reserve Bank's monetary policy committee meets in June.

Manuel said after meeting the Statistician-General, Pali Lehohla, that the size of the mistake was not yet clear, and steps were being taken to prevent a repetition.

Only a one percent cut is expected initially, but there could be further cuts before the end of the year if Statistics South Africa does, as expected, revise the inflation figures downwards on Friday.

High inflation has been one of the main reasons behind the punishing increases in interest rates over the past year, which have particularly affected home owners, who have seen mortgage rates rise inexorably.

This has boosted the rand, with knock-on negative effects for export earnings.

The statistical glitches were highlighted last week by John Stopford, a portfolio manager at Investec, who said house rentals had been overstated, skewing the true extent of inflation.

George Glynos, a market analyst at Money Market Services, said other items in the consumer price inflation basket, including motor vehicle costs, could also have been overstated.

To measure inflation, most countries use a consumer price index (CPI), which is an index of the prices of a "basket" of consumer goods and services.

The total South African CPI basket consists of about 1 500 different consumer goods and services, classified into more than 40 groups, for which separate indices are constructed.

StatsSA collects the data each month by sending questionnaires to about 3 600 retailers. Some prices are collected directly by StatsSA officials and the information supplied by the retailers is checked for consistency and possible errors.

The CPI for each month (based on the prices during the first seven days of the month) is published during the second half of the following month.

In the late 1990s, StatsSA started publishing a "core" inflation rate in addition to the unadjusted or "headline" inflation rate to identify underlying inflationary pressures in the economy by excluding some goods from the CPI basket because their prices were highly volatile, subject to temporary influences or affected by government intervention and policy.

Among the items excluded were fresh and frozen meat, fish, vegetables, fresh fruit and nuts, interest rates or bonds and overdrafts or personal loans, value-added tax and municipal assessment rates.

When the government decided to adopt inflation targeting in 2000, one of the main decisions it had to take was to choose which inflation rate should be targeted - headline, core or something in-between.

After much research and debate it was decided to use the rate calculated on the basis of the CPI, excluding mortgage interest rates only. This rate is called the CPIX rate. - Business Report

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