The South African Federation of Civil Engineering Contractors (Safcec) and the Steel and Engineering Industries Federation of South Africa (Seifsa) are analysing the potential impact of the changes made to both the producer price index (PPI) and consumer price index (CPI) on their member firms.

Both organisations have indicated to Engineering News Online that they will comment on the impact of the changes at a later stage.

“We already had to come up with solutions to incorporate this [the changes] into our own Seifsa indices,” Seifsa chief economist Henk Langenhoven reported.

Next week Tuesday, Statistics South Africa (Stats SA) will published the January PPI figures, which will be the first to feature industry-specific PPIs, with a new weighting structure and product list.

The new PPI will not feature an aggregate headline PPI, but rather five distinct PPIs covering agriculture, mining, electricity, water and manufacturing. The PPI for final manufactured goods will be considered the 'headline' PPI.

The index, which is mainly used by businesses as a contract price escalator, reflects changes in the prices charged by producers across more than 100 diverse industries.

Manufacturing has been split into those products that were usually an input into further processing, such as metal sheets, and those that are destined for final demand – products that would 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,” StatsSA executive manager for price and employment statistics Patrick Kelly explained.

"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," he added.

Firms that used the aggregate PPI for contract price adjustment purposes would need to switch to the new headline measure or identify a relevant subindex.

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

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

CPI CHANGES

Last month, Stats SA also published the first release of the freshly reweighted and rebased CPI. But changes were more subtle than those made to the PPI.

The CPI, which reflects the spending patterns of consumers, is used by the South African Reserve Bank as the inflation-target measure and, together with the PPI, is frequently used by businesses and individuals to escalate contracts and negotiate wage increases.

South African consumers were about 25% better off now than they were in 2005/6 according to the results of the latest and previous expenditure surveys, Kelly pointed out.

Kelly noted that most of the growth in expenditure had 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 were viewed as being discretionary, and dropping some that are relatively basic.

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

Some of the new additions to the rest of the basket were package holidays, the services of electricians and plumbers, energy-saving lightbulbs, sports boots and hair extensions.

Items that would no longer be surveyed were portable radio or compact disc players, green laundry soap, candles and firewood.

Kelly added that the new CPI series would give greater weight to electricity – from 1.7% up to 4.1%, while also increasing that of housing rentals to 4.8% from 3.5% and medical aid premiums to 7.9% from 3.7%.

Products that showed decreased budget shares included vehicles – falling from 11.3% to 6% and tobacco products that slumped from 2.3% to 1.5%.

Kelly noted that changing the weights and basket of the CPI provides the opportunity to rebase the index, a technique that sets the CPI and all its indices equal to 100 in a particular period.

“Failing to do this would exaggerate the impact of high-inflation items on the overall index, and understate the impact of low-inflation items,” he stated.