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Data revision puts inflation target in reach.

Office, Retail, Industrial, Hotels and Residential
Posted On Monday, 02 June 2003 02:00 Published by
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But treasury is the loser in bond market.
STATISTICS SA took the unprecedented step last week of revising consumer inflation data from early last year to take account of an error in its residential rent figures.

 In one fell swoop, the downward revision resulted in the Reserve Bank's targeted inflation measure, CPIX (consumer inflation less mortgages) declining to a single-digit figure of 8,5% in April.

 In fact, inflation was already in single digits (9,3%) in February after Stats SA revised rental figures and brought that month's figure down from the 11,3% that was previously reported. The revised figures also show that CPIX peaked at 11,3% in October and November last year, rather at 12,7% in November, which was the figure released using the old rental figures.

 Economists expect the Bank to meet its inflation target of 3%-6% comfortably next year, with average CPIX settling at the midpoint of the target next year.

 The target may still be missed this year, but only marginally, economists said. Forecasts for average CPIX this year have dropped from about 8,3% to about 6,9%.

 The improvement in the outlook should reduce inflation concerns and make it easier for the Bank to cut interest rates next month by one percentage point, with two more cuts this year, economists said.

 With forecasts coming down, there is still much uncertainty about whether price contracts that are linked to inflation could become contentious.

 Wage settlements were agreed upon at levels substantially higher than inflation, making employees instantly better off.

 But could divorce contracts, which in many cases link maintenance payments to inflation, be reopened because inflation was overstated until now?

 Nedcor's chief economist Dennis Dykes said this could become a serious problem.

 "The big contentions will be seen in divorce settlements, partly because these settlements are done on a once-off basis, depending on when the divorce came through. In the past, we have never seen a revision of consumer inflation data because of these reasons," he said.

 It appears government will be a clear loser from the revision , having overpaid investors of inflationlinked bonds. The national treasury is tight-lipped at the moment, not divulging the extent of the overpayment. But, going forward, bondholders will have to contend with seeing returns declining sharply.

 Stats SA has come under tremendous criticism for allowing the mistake to occur in the first place and for not acting in good time to correct the situation when first alerted to it.

 The agency has now taken steps to rectify the error in rental information, which was overstating inflation. Prior to the revision, the last time rentals were surveyed was in the 1999 October household survey.

 At that time, rents for houses, flats and townhouses were shown to have increased by 34,5% annually.

 The exaggerated and outdated rental information began distorting CPIX from early last year which, when compared to the new revised figures, make for startling reading.

 Martie Grobler, a professional in price statistics at Stats SA, calculated that during last year, rents for houses increased by 5,51% annually, flats rose by 40,6% and townhouse rents doubled, rising by 99%.

 With the revised figures, rents for houses for the same period increased by 12,5%, flat rentals rose 13% and townhouse rents increased by a much more sedate 13,5%.

 Stats SA said it w ill now use external data sources to update rental figures every quarter, until it has its own rental survey up and running.

 The Statistics Council would conduct a "process review" of the consumer inflation figures to identify any systemic risks in the compilation of the data, Stats SA said last week. With Rochelle McCauley
Publisher: Business Day
Source: Business Day
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