The recent hawkish statements by the central bank on inflation seem to have been backed up as the 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 4,1% year-on-year (y/y) in May after a 3,7% y/y increase in April, according to Statistics South Africa (Stats SA) numbers on Wednesday.
The two big concerns on the inflation front continue to be food and transport and after reading the Reserve Bank’s recent quarterly report for the first quarter of 2006 these are the two bugbears we can expect to remain with us on the path to 6,2% in 2007.
This rocky path is likely to see resultant increases in interest rates until a cooling can be seen.
In May, the annual increase of 4,1% in CPIX for the historical metropolitan and other urban areas was reported by Stats SA to be due to increases of 1,5% points on food (from 1,4% points the month before), 0,8% points on transport (from just 0,5% the month before), 0,6% points on medical and health expenses, 0,5% on housing excluding mortgage interest, 0,4% points on education and 0,2% points on alcoholic beverages (unchanged).
The increases were reported to be counteracted by decreases in clothing and footwear (-0,2%), furniture and equipment (-0,1%) and communication (-0,1 of a percentage point).
On analysis the counterbalancing impact of clothing, furniture and communication was not strong enough as they were unchanged from the decreases in April. The rises in food and transport therefore clearly upset the applecart in May.
The core inflation rate, which excludes volatile foods, municipal rates and monetary policy changes, was up 3% y/y in May from an increase of 2,8% in April. The key driver here was transport, up 1,3% points from being up 1,1% points in April. The impact of oil is therefore a major driver behind our numbers as even with food stripped out, core was not good at all.
The central bank clearly indicated in its quarterly bulletin last week that threats to the economy remained and predicted that their models indicated CPIX inflation would go so far as to break the 3% to 6% band in 2007 to reach a level of 6,2%, after which it would only subside.
The increase to over 4% is therefore cause for concern and tied in with the worst current account deficit in 24 years at 6,4% of GDP, adds credence to the fact that another increase in interest rates can be expected at the upcoming MPC meeting on August 3.
While talk has been hotting up that an emergency meeting could be held before then to increase rates to assuage the market and the rand, analysts generally feel that would be premature and that caution should be exercised, with the impact of the first increase first being absorbed.
With the CPI numbers for May increasing at 3,9% y/y from 3,3% and CPIX breaking 4%, the markets will be factoring in another 50 to 100 basis point increase, with forward rates already factoring in a full 150 basis points by the end of the year. Producer price numbers will initially start reflecting the full impact of the increases at the factory gate, which are now expected to be passed on to consumers.
CPIX forecasts were spot on as they were expected to have increased to 4,1% in May, an I-Net Bridge survey of economists found. Forecasts ranged from 3,8% y/y to 4.2% y/y.
The SARB inflation target range is from 3% to 6% y/y and since January 2004 all but four releases were at or below the mid-point of this range. – I-Net Bridge