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Saturday, September 1, 2007
Things ain’t what they seem to be……

Do you believe the figures from Stats SA – we know they’ve made mistakes before - and it is surely the case now with our inflation rate statistics?

The accompanying table shows the actual price increases the last 12 months for a sample of items, and they are all way over the fictitious 6,5% pa CPIX (the official inflation rate excluding mortgage interest rates) for July 2007. Even the normal CPI is a mere 7,1%, according to officials. Such figures do not explain many things going on in the economy, for example, why is the rand so weak?
With mortgage costs up 21%, gas up 36% and many foods clocking past the 25% barrier it should be no surprise when workers go on strike for wage increases of a modest 10%.
Before purists leap up and down and demand scientific proof of our figures let’s just say they were taken from actual till slips dated June or July 2006 as against June or July 2007. The only exception is the fuel price which, oddly enough, comparing August 2006 to August 2007 was fairly constant at around R6,80 a litre. This, of course, hides a high volatility in fuel price movements over the year and in any event does not give the full story.
The fuel price was R5,32 in December 2005, so an 18-month statistical view is perhaps more valid, as higher fuel prices continue to filter their way through to the economy over the longer term.
With all this going on it is a complete mystery why the authorities seek to increase the price of something we’ve already bought: to wit, a mortgage loan.
And don’t forget all price increases, however small, have to be funded from after-tax income. On average you can add around 20% to the additional cost of living just to cover the tax on the higher earnings you need to keep afloat. In other words, if a worker’s marginal tax rate is 20% and the price of brown bread goes up 25%, then the actual gross rand cost increase is 31,25% — because the 25% is after-tax money you actually need to earn 25/80 * 100 to buy the loaf.
How can Stats SA say vegetables have gone up 6,4%? Where do they get their figures from? According to them housing has gone up 9,6% and fuel and power 7,6%. What fictional household are they talking about?
What else does not tie up is the rand/dollar exchange rate. At around R7,23 it remains weak against a weakening dollar.

The United States is in a very vulnerable position with huge personal debt mountains threatening the stability of the banking system. The Chinese are finding ways to duck out of US equities. On the other hand there are huge capital inflows coming into the South African stock market, a factor that should strengthen the rand.
At the time of the first general elections back in 1994 the exchange rate was R3,63 to the dollar, so it has lost half its value. Our currency is around R14,36 to the pound, down from R12 three years ago. Inflation differentials between countries go along way to explain this – a CPI of 7,1% doesn’t. By Nigel Benetton

Copyright © Insurance Times and Investments® Vol:20.8 1st September, 2007
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