Revamp will 'lower' inflation

From February 2009, it will introduce a revamped CPI with the publication of the CPI for January 2009. Various changes, methodological and other, will be implemented in the construction of this CPI, Stats SA said.

The CPI will undergo reweighting with the introduction of new expenditure weights, based largely on the Income and Expenditure Survey (IES) 2005/06. Associated with this change is the update of the CPI basket.

On the basis of the recently released IES 2005/06 and other data sources, Stats SA has constructed a new CPI basket. As part of the reweighting process, new items have been included and some items currently included in the CPI excluded from the new basket, with importance within total spending and widespread purchasing the main criteria for inclusion in the basket.

Shift away from food

For those items that continue to form part of the CPI basket, their relative importance as indicated by their respective weights may have increased or decreased.

Stats SA said there have been some substantial shifts in the spending patterns of households between 2000 and 2005/06.

There are two effects that will impact on calculated inflation, it explained. Incomes have risen between 2000 and 2005/06 and, as a result, spending patterns have changed. This income effect saw a shift in expenditure away from food towards transport and services. The second effect, a substitution effect, results in households shifting their expenditure away from higher inflation items towards lower inflation items.

Overall, given these behavioural changes, it is anticipated that the reweighting of the CPI will result in a decrease in the level of measured inflation, Stats SA said.

The share of services in the 2000 weights is 38.1%, while in the new weights set, services will account for 43.7% of total consumer expenditure.

The most significant changes have taken place in the food, transport and miscellaneous categories.

The food weight drops from 26.6% to 20.2% (including restaurants in both figures).

The weight for transport increases from 12.98% to 17.79%. Specifically, the weight for the purchase of motor vehicles has increased from 4.81% to 10.23%.

The weight for insurance has increased significantly between 2000 and 2006. Insurance expenditure includes property and vehicle insurance as well as medical aid contributions. Insurance as a proportion of the total rose from 1.81% to 7.21%. Medical aid contributions and other health insurance in particular have increased significantly from a 2000 weight of 1.33% to 3.37% in 2006.

Drop in health expenditure

Stats SA noted that one category that experienced a significant drop in weights is health. The health weights include only expenditure actually incurred by households, and not expenditure incurred by employers or medical aid schemes on behalf of households. This was not the case in the 2000 weights. It is also possible that consumers shifted their expenditure from actual health purchases to medical aid contributions. Thus, when comparing equivalent data from the 2000 and 2006 IE Surveys, health shows only a small increase in its proportion from 1.5% to 1.9% whereas the 2006 CPI weight is 1.48% compared with 5.13% in 2000.

- I-Net Bridge