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With Statistics South Africa (Stats SA) having taken over the responsibility of calculating GDP from the expenditure side from the Reserve Bank, we decided it is time to look at what the CPI would have been if the CPI used the main grouping weights as calculated by the GDP expenditure approach.
There will obviously be differences in the weights, as the classifications, data sources and indicators, GDP expenditure weights we used are in real terms and seasonally adjusted and the weight periods are vastly different, but it should provide some interesting insights into the impact that different weights have on the calcualted CPI. GDP expenditure Q1:2016, seasonally adjusted real prices are used, while the CPI weights for all urban areas are used. The graphic below shows the year on year CPI for both published and the CPI calculated using GDP expenditure weights. |
The graphic above shows the year on year percentage change in the official published CPI (the blue line), and what CPI would have been if the CPI was calculated using the most recent weights (Q1:2016) from GDP expenditure approach (red dashed line).
While the trends are very similar, the average inflation rate experienced over the period in question amounted to 5.5% for the published CPI, against 5.3% if CPI was calculated using the weights from GDPE. A more detailed breakdown of the growth rates between the two methods are shown in the table below.
While the trends are very similar, the average inflation rate experienced over the period in question amounted to 5.5% for the published CPI, against 5.3% if CPI was calculated using the weights from GDPE. A more detailed breakdown of the growth rates between the two methods are shown in the table below.
Table 1: Average inflation per year using two different methods
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From Table 1 to the left it is clear that using the weights from GDPE gives a lower CPI growth rate in all but one year (2009). While the differences are not substantial, when one takes into account the fact that CPI is the main gauge used by SARB when deciding on interest rates, the lower figure calculated by using GDPE weights, could have convinced SARB at an earlier time to slow on their interest rate rising policy, which as we have discussed at length in these two blog posts (Demand for durable goods and transport spending plumments & Munufacturing of durable goods falls off a cliff)
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It will be interesting to see how the CPI's next set of weights used in the calculation of the CPI compares to the weights of the main groupings as calculated by GDP expenditure approach. We wonder if the Reserve Bank ever conducted an exercise like this when they were still in charge of publishing the GDP from expenditure side. And if so, whether results like these ever made it to the monetary policy committee meetings?