Inflation data backs rate hike

Johannesburg - 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 10.4% year-on-year (y/y) in April from 10.1% y/y in March, Statistics South Africa (Stats SA) said on Wednesday.

CPIX was up 1.6% month-on-month (m/m) after it increased 1.6% m/m in March.

This is the thirteenth month running that CPIX has been above the 6% upper target limit.

Headline consumer prices - the 12-month rate of change in the consumer price index (CPI) for metropolitan areas - was up 11.1% y/y in April from a 10.6% y/y increase in March.

The core inflation rate, which excludes volatile foods, municipal rates and monetary policy changes, was up 10.2% y/y in April from 9.8% y/y in March.

CPIX was expected at 9.9%, an I-Net Bridge survey found, with forecasts ranging from 9.8% to 10.3% and from just 6.3% a year ago.

Headline CPI was expected to have remained unchanged at 10.6%, but still surpassing the high levels seen in early 2003.

Forecasts for CPI ranged from 10.4% to 10.9%, from 7.0% a year ago.

Stats SA said the annual increase of 10.4% 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 (+4.5 percentage points), transport (2.1 percentage points), housing excluding interest rates (0.9), household operations (0.6), medical care and health expenses (0.5), fuel and power (0.4), education (0.4), personal care (0.3), cigarettes, cigars and tobacco (0.2), and clothing and footwear (0.2).

This was counteracted by a decrease of 0.1 in furniture and equipment.

The annual increase of 11.1% in the CPI for the historical metropolitan areas was mainly due to relatively large annual contributions in the price indices for food (+3.8 percentage points), housing (2.3), transport (2.3), household operations (0.6), medical care and health expenses (0.5), education (0.4) and fuel and power (0.3).

Annual CPIX for 2007 was at 6.5% from the 4.6% in 2006, while annual CPI was at 7.1% from the 4.7% in 2006.

Economists said that the CPIX figures almost guarantee a rate hike.

"That seals the case for interest rate hikes. Inflation continues to shock. We are in a high GDP slowdown environment, which is not good for bonds nor the local stock market, and in the longer run not good for the rand either.

"I think this is a country in dire straits," says T-Sec economist Mike Schüussler.

Absa Capital economist Monale Ratsoma said, "These numbers combined with the governor's recent hawkish comments are increasingly pointing to a 50 basis point rate hike in June, and the market is now pricing in a 70% chance of another rate hike in August."

- I-Net Bridge