CPI surprises 'thing of past'

Johannesburg - Economists said November will probably be the last month the consumer price index (CPI) surprises on the upside, after it clocked in below the key 6% ceiling band for the month on Tuesday.

CPI rose 5.8% in November compared to the same month in 2008, and is virtually unchanged from October's 5.9% year-on-year reading.

One of the key factors behind the stable figure was the fact that South Africa's petrol price did not increase during the month.

A more concerning reason is that interest rate relief over the past year has failed to restore consumer demand, which remains depressed. As a result, retailers have little leeway to mark up prices of consumer goods.

On the flip side, food price increases have moderated somewhat. This will provide modest relief to consumers who have been hard hit by the recession.

However, the picture could change somewhat in 2010. Economists polled by I-Net Bridge expect inflation to surge, as global economies embark on a slow and painful recovery process which will be accompanied by rising food and fuel prices.

"This may be the low point for inflation in this particular cycle and we will probably see it tick up in the next few months," said Chris Hart, economist at Investment Solutions.

South Africa will also be affected by a sizeable increase in electricity prices, as power utility Eskom is currently requesting a 35% tariff hike.

"Electricity tariff increases of even 35% will keep CPI out of target in 2011 from when the tariff hikes are instituted," said Annabel Bishop, economist at Investec Group Economics.

Meanwhile, economists are doubtful that November's steady inflation will result in any type of interest rate easing early next year. Rates are expected to stay constant in South Africa for the biggest part of 2010.

"I continue to believe that the interest rate cycle has reached a bottom at 10.5% prime and that we will stay constant at this level for a prolonged period," said Elize Kruger, economist at KADD Capital.

Bishop said the first interest rate hike is only likely to happen late in 2010.

"Even this monetary tightening at the end of next year will be heavily dependent on economic performance and may well be delayed until 2011," she said.

- Fin24.com