Inflation: Worse to come?

The increase in South Africa's consumer price index excluding mortgage rate changes (CPIX) for metro and other areas, which is used by the South African Reserve Bank (SARB) for its inflation target, was up 13.0% year-on-year (y/y) in July from 11.6% y/y in June, Statistics South Africa (Stats SA) said on Wednesday.

This is the sixteenth month running that CPIX has been above the 6% upper target limit. The previous all-time high before June this year for CPIX was the 11.3% set in 2002.

Headline consumer prices - the 12-month rate of change in the consumer price index (CPI) for metropolitan areas - was up 13.4% y/y in July from a 12.2% y/y increase in June.

The core inflation rate, which excludes volatile foods, municipal rates and monetary policy changes, was up 13.7% y/y in July from 12.0% y/y in June.

CPIX was expected at 12.9%, an I-Net Bridge survey found, with forecasts ranging from 11.2% to 13.5% and from just 6.5% a year ago.

Headline CPI was expected to have increased by a whopping 13.6% from just 7% a year ago.

Forecasts for CPI ranged from 12.1% to 14.1%.

Reactions

Chisto Luus, economist at Ecoquant said, "A bit of a shocker, but not entirely unexpected. We did anticipate that we would see inflation peaking in September or October. Thereafter there should be some respite and pull back in inflation. We may see worse figures.

"I expect CPIX will hit 14% before there is a turnaround. This is the consequence of exceedingly high oil and food prices - although food prices are believed to have peaked. By October or November the worst should be over."

George Glynos, a market analyst at ETM explains that it was expected. "The figure is broadly in line with our expectations and I think there is not to much new to read into this. It reflects very strong growth obviously. I think that this could be the peak in inflation, depending on the kind of petrol price cut that we see for the September figure."

According to Annabel Bishop, economist at Investec, "Today's publication of a record high CPIX inflation figure was chiefly driven by rising food, petrol and electricity prices. A potential cut of R1/litre is being scheduled for September, which will provide a lot of relief to the inflation outcome in that month.

"Next year's re-weighting exercise will result in a lower level of consumer inflation. In addition, the mortgage interest rate component of CPI will be done away with, replaced by the income which can be charged for renting homes instead of living in them.

"By definition, CPIX inflation would potentially fall away. Whether CPIX inflation would be replaced by CPI inflation as the targeted measure is uncertain but the new measure to be targeted is likely to be announced at November's MTBPS.

She added: "We expect no more interest rate moves this year. The sharp drop in the level of inflation in 2009 is likely to cause the SARB to cut interest rates significantly, beginning with a 50bp easing at the April MPC meeting."

- I-Net Bridge