Construction of CPIX Data for Forecasting and Modelling in South Africa

South Africa adopted inflation targeting in 2000, targeting the consumer price index (CPI) excluding mortgage interest cost (or CPIX), for “metropolitan and urban areasâ€. However, no clear technical account of the methodology of construction of CPI and CPIX is available from Statistics South Africa, as published by reputable government statistical agencies in other countries. We aim to enhance transparency by explaining the methodology as we understand it, and to encourage the official publication of a technical handbook of CPI methodology. We provide evidence that the CPIX data published by Statistics South Africa uses a methodology inconsistent with their construction of the CPI data. As a result, annual increases in CPIX were overstated by as much as one percent at the end of 2001 and in January, 2002; and understated by a similar amount in November, 2003 to January, 2004. Further, while the CPIX (`metropolitan and urban areas`) measure only became relevant to monetary policy setting and wage contracts from 2000, and is published monthly only from 1997, a far longer time series is required for the forecasting and modelling exercises of the South African Reserve Bank (SARB) and others. We produce estimates of CPIX (`metropolitan and urban areas`) back to 1997, and CPIX (`metropolitan areas`) back to 1970, on a consistent methodology, using monthly price indices, the appropriate weights, and linking correctly when rebasing Both measures differ from those published by Statistics South Africa (published back to 1994 only in the latter case). They also differ significantly from internal SARB quarterly estimates of historical CPIX data, used by SARB modellers and the International Monetary Fund.