If inflation is running wild, adjust the basket, it helps

In its latest Economy Watch published last week, the Institute for Public Policy Research (IPPR) pays much attention to the new weightings in the consumer basket that determines headline inflation. Reworking not the methodology, but only the components, and rebasing the index values to December 2012, have surprisingly lead to a rather pronounced decrease in the Consumer Price Index.
Whereas a month ago the index measured 6% higher than in September 2012, the October monthly reading, compared to October last year, now shows a welcome relief falling more than one percentage point to 4.9%. This reading may or may not be a reliable indication of average inflation but at least, the Namibia Statistics Agency has started a process that hints of a rather drastic overhaul of statistics, both in terms of measurement principles and in methodology.

The new CPI reading presents another slight anomaly. Since the inflation index in South Africa has not been adjusted recently, they still post (an expected) reading of 6%. With our new basket design, we have entered into those brief, short-lived periods where local inflation is actually somewhat lower than SA inflation. This is usually an indication of either data distortions, or worse, very slow expansion in the local economy.
When I say that the new CPI may or may not be reliable, it is not an attempt to knock the redesign. Revising the CPI is long overdue, and it is only in theory that an average inflation rate exists. In reality, the broader as well as the narrower inflation rates of any particular individual (household) are never exactly the same as the next individual or household. It is the nature of consumer patterns that every person has his or her own unique inflation rate, and that no two are alike. This particular fact is widely recognised by statisticians, hence their diligent efforts to make so-called average inflation, as representative as can be expected.
The IPPR also points out that, in a sense, the rebasing and reweighting has for all intents and purposes, posted a “new” inflation benchmark and that any comparison between the new index and the previous, has to be done with care.
Just to give an idea of the importance of the revised metric, I pick at random some of the more prominent changes, as discussed by the IPPR.
The category Housing, Electricity and Water now weighs 28.4% in the new basket, up from 20.6% in the old. This is a dramatic adjustment. Although on paper, it only looks like an adjustment of 7.8 percentage points, in real terms, it is an increase of 37.9%. In statistics, this is a major shift, not just a tweak. In practise it means that this component now weighs almost 40% more in the consumer basket than previously, and that other items must be reduced in weight to make room for the growing importance of Housing, Electricity and Water.
Again, this process is not based on thumbsuck but follows the results of the 2009/10 Household Income and Expenditure survey, so the reweighting is based on fact, or observation, and should more accurately reflect the “average” consumer pattern.
The biggest adjustment downwards is in the Food and Non-alcoholic Beverages category that also made a tectonic shift, down from 29.6% to 16.5% of the total basket weight. This definitely says the Household Income and Expenditure survey indicates that we eat and drink a lot less than previously thought, except when it comes to booze.
The IPPR rightfully expresses concern over the fact that the category Alcoholic Beverages and Tobacco jumped from 3.3% to 12.6% in weight. Now, if ever there were any doubt about our ability to party, at least now it has been confirmed by the authoritative HIE survey. I think churches and other social support organisations should be just as concerned as the public policy think tank, and as I am. A large part of the Economy Watch discusses other pertinent economic issues, most notably commodity prices, exchange rate weakness, expected growth, and downward revisions. It offers in my view, a fairly reliable picture of the local economy as it was a month ago. But, unfortunately, the general flavour of this last one is that the economy is treading water in anticipation of uncertainties in other parts of the world. It does not paint a picture that says the economy is performing on par, or better than the massive stimulus that has been poured into job creation, expansion, capacity building, and all the other popular descriptions we employ to hide the fact the economy is running on volatile juices.