Johannesburg - SA's CPIX (consumer price index excluding interest rates on home mortgages) inflation rate surged to 13.6% in August from 13% in July, the 17th month running that the targeted inflation rate has been above the 6% upper limit of the target. The figure is an all-time high for the CPIX rate.

While there was some disappointment that the rate came in higher than expectations of 13.3%, economists said the CPIX rate was probably at a peak. Given changes to the inflation basket and base year from next year, the current rate wouldn't prevent the Reserve Bank from cutting interest rates from next year.

Statistics SA said the annual increase in the CPIX for the historical metropolitan and other urban areas was mainly due to relatively large annual contributions in the price indices for food (5.3 percentage points), transport (3.1), fuel and power (1.3), housing (0.9), household operation (0.8), medical care (0.6), education (0.4), clothing and footwear (0.3) and personal care (0.3).

Nasty surprise

Absa Capital economist Jeff Gable said the 13.6% inflation rate was unfortunately a big upside surprise, which resulted in some weakness in the fixed income and forex markets.

However, this had been tempered by the extremely poor retail sales figures which had been released earlier today. Stats SA said on Tuesday morning that retail sales had fallen 4.6% year-on-year in July.

Gable said the market had noted comments on Tuesday morning by Reserve Bank Governor Tito Mboweni that there was a risk to having negative real interest rates. (That is, interest rates less inflation of below zero.)

However, Gable said there were a number of reasons why his comment needn't be a worry.

Retail sales had cooled dramatically from the increase rate of 9.5% in the first half of 2006 to a decline of 1.5% in the last six months.

In addition, the housing market was undergoing a significant slowdown, vehicle sales were plummeting and consumer confidence was at multi-year lows.

Gable believed consumers were focused on the high nominal interest rates, and not on negative real rates.

"We believe the Reserve Bank will look through these latest inflation numbers and deliver rate cuts early in 2009," Gable said.

He said cuts could come from April next year, but there was an off-chance that the first cut could be as early as February.

Karen Chow, an economist at independent market analysts ETM, said the inflation rate had come out higher than the market had expected because people hadn't taken into account the electricity tariff increases implemented by municipalities.

She said she expected that inflation was at a peak, but warned that because it was so high, people might have to scale back their rate cut expectations.

The markets were pricing in rate cuts from February, but she believed that was too soon.

Rate-cut optimism

The Reserve Bank has raised the repo rate (the rate at which the central bank lends to banks) by five percentage points since June 2006, bringing the prime overdraft rate to 15.5%.

The Reserve Bank said in its last monetary policy committee statement that the Bank expected inflation to peak at an average of 13% in the third quarter of this year, then to decline significantly in the first quarter of 2009, before declining gradually to fall within the upper limit of the target range in the second quarter of 2010.

Despite the long wait for inflation to fall within the target, and the fact that the Reserve Bank expects inflation to remain fairly high for the whole of 2010, markets have been optimistic about rate cuts.

Finance Minister Trevor Manuel is expected to announce in the mini-budget on October 21 that the new target measure for inflation will be the rate of change in the consumer price index (CPI) and no longer CPIX.

The change comes about because the CPI will no longer include mortgage bond costs, which Stats SA is now using as a proxy for the cost to homeowners of living in their own homes.

This cost is excluded in CPIX, as it would be paradoxical to have higher interest rates result in higher inflation.

In the new system, Stats SA will survey rentals and continue to make use of the consultancy that currently surveys them for the CPI.

Total rentals in the new CPI will have the highest weighting - higher than food and beverages - and are difficult to predict.

- Fin24.com