South Africa’s latest pricing reports point to sustained inflation pressures and the risk of higher interest rates in 2007, according to international analysts Moody’s Economy.com.
“Consumer price inflation accelerated only slightly less aggressively than foreseen in March, with the banner CPIX measure rising 1%, pushing annual inflation to 5,5% from 4,9%.
“The markets were looking for 5,6%, but this marginal undershoot will be cold consolation given that the South African Reserve Bank [SARB] held tight earlier this month, opining that inflation would not break through the 6% annual target ceiling,” says Moody’s Economy.com.
“The 4,2% government-enacted increase in gasoline costs in March was aggravated by higher global oil prices and a weaker rand. In April, a further 11% rise was brought in and this will be followed by a 5,1% hike on May 2.
“These administrative adjustments will continue to put upward pressure on the CPIX and if food prices continue to rise as rapidly — due to drought conditions both in Africa and elsewhere in the southern hemisphere — the SARB may find itself with headline inflation above its 6% tolerance level at its next meeting in June.
“Worryingly, core inflation, which excludes the price of certain foods, jumped to 4,9% year-on-year in March from 3,9% the month prior,” it adds.
Moody’s Economy.com says higher interest rates will do little to curb inflation in either petrol or food prices, but they will prevent the upswing in price growth from being anchored into expectations.
“Earnings growth accelerated economy-wide over the course of 2006 and, with acute skills shortages in certain sectors and a third of all employers intending to expand hiring in the coming quarters (according to Manpower), wage inflation could easily accelerate further. Thus, the SARB will have to consider the risk of secondary inflationary forces being transmitted through expectations and wage demands in the coming months,” it says.
“The most recent producer price index was another reason to be concerned about building pipeline price pressures. In March, the PPI jumped 1,2% to push year-ago price growth to 10,3% from 9,5%.
“This is the fastest gain since 2002 and was driven by surging agricultural and petrol prices and more modest gains in the cost of foodstuffs, basic metals, and mining and quarrying. There were no offsetting factors, implying that the upward pressure on consumer prices will continue,” concludes Moody’s Economy.com. — I-Net Bridge