STATS SA ERROR CAUSED INTEREST RATE HIKES

Date Added: 7/16/2008
Author/Source: Jessica van Sittert of BrayCorp Financial Services


STATS SA ERROR CAUSED INTEREST RATE HIKES

As a result of the two-year delay by Statistics SA (StatsSA) in implementing the rebasing and reweighting of the inflation basket, inflation may have been reported to be 2.2% higher than its actual value.

Calculations by Investec Asset Management indicate that while the official CPIX released for May was 10.9%, the true CPIX is actually 8.7%.

The implications of this are devastating.

Monetary Policy is based on the official inflation rate figures published. While inflation is on the rise, the extent of this rise has been exaggerated. Had the true inflation figures been released, we may have seen fewer interest rate increases.
André Roux, head of fixed income at Investec Asset Management, believes that ‘…interest rates would have been at least 1 – 2 % lower than current levels.’

While the effect of this error is significant regarding interest rates, inflation affects many pricing decisions, including retailer price adjustments and wage negotiations.

The only question now is whether the MPC (Monetary Policy Committee) will take this into account when considering whether or not to raise interest rates again when they meet in August.