By: Patrick Kelly

Last month, Statistics South Africa (Stats SA) published the first release of the freshly reweighted and rebased consumer price index (CPI), and last week the overhauled producer price index (PPI) was published.

While the CPI gets plenty of media coverage, owing to its use by the South African Reserve Bank as the inflation-target measure, it is, together with the PPI, frequently used by businesses and individuals to escalate contracts and negotiate wage increases.

As its name implies, the CPI should reflect the spending patterns of consumers. For this reason, the selection of each product in the CPI, and the relative weight of each on the headline inflation rate, is based on a comprehensive survey of household expenditure.

South African consumers are about 25% better off now than they were in 2005/6 accord- ing to the results of the latest and previous expenditure surveys.

Most of the growth in expenditure has been driven by the emerging black middle class. This increase in spending power translated into changes to the CPI ‘basket’ by adding goods and services that are seen as being discretionary, and dropping some that are relatively basic.

New food items in the basket include drinking chocolate and filter coffee, mageu, feta cheese and mineral water. These replace samp, dried peas and beans and frozen peas and carrots, among others.

Some of the new additions to the rest of the basket are package holidays, services of electricians and plumbers, energy-saving light bulbs, sports boots and hair extensions. Among those items which will no longer be surveyed are portable radio/compact disc players, green laundry soap, candles and firewood.

The new CPI series will give greater weight to electricity (up to 4.1% from 1.7%), housing rentals (up to 4.8% from 3.5%) and medical aid premiums (up to 7.9% from 3.7%). Products which have shown decreased budget shares are vehicles (down from 11.3% to 6% – in part the result of improved methodology) and tobacco products (from 2.3% to 1.5%), among others.

Changing the weights and basket of the CPI provides the opportunity to rebase the index. Rebasing is a technique that sets the CPI and all its indices equal to 100 in a particular period. This is a bit like restarting a race, because by bringing all indices to a common point, the historical divergences between indices of different products are eliminated. Failing to do this would exaggerate the impact of high-inflation items on the overall index, and understate the impact of low-inflation items.

Rebasing can cause confusion when using the index for contract escalations as the actual values of the indices change. However, the rates of change between the index values do not change. Historical indices rebased to December 2012 are available from Stats SA or on its website.

The changes to the producer price index are more substantial than those of the CPI. The PPI is mainly used by businesses as a contract price escalator, rather than as a general measure of inflation and monetary policy target – which the CPI is.

In fact, the PPI presents a more textured picture of inflation in the economy than does the CPI. This is because it reflects changes in prices charged by producers across more than 100 diverse industries.

In a departure from historical practice, Stats SA is publishing five distinct PPIs to cover agriculture, mining, electricity and water, and manufacturing.

Manufacturing is split into those products that are usually an input into further pro- cessing, such as metal sheets, and those that are destined for final demand – products that will not be further processed, such motor vehicles.

This means that there will no longer be an aggregate headline PPI, which was a composite of the price changes over the vast variety of products generated by South African industry.

Very few countries publish such an aggregate because its true economic meaning is difficult to pin down as it combines price changes from different stages of the production process – for instance, food prices charged by both farmers and manufacturers.

The PPI for final manufactured goods will now be considered as the ‘headline’ PPI as this is the final stage of production and inherently reflects the accumulated impact of price changes back through the production value chain.

Firms that have used the aggregate PPI for contract price adjustment purposes will need to switch to the new headline measure, or identify a relevant subindex (like the PPI for rubber products).

In addition to the main PPIs, Stats SA compiles indices for use by the construction industry to escalate multiyear contracts.

The Construction Price Adjustment Provisions, or CPAP, indices are to be enhanced with tables of specific construction product indices which were formerly part of the main PPI publication.

• Kelly is Statistics South Africa's executive manager: price and employment statistics - PatrickKE@statssa.gov.za