While core inflation moderated a tad in July, indicating a slight softening in broader-based inflation, headline numbers remain the key bugbears driving CPIX (consumer inflation less mortgage costs) to its highest level in close to four years and sealing the fate for another increase in interest rates in October.
CPIX for metro and other areas, which is used by the South African Reserve Bank for its inflation target, remained above the 6% upper limit for the fourth month running in July as it rose above expectations to 6,5%, and has confirmed elevated levels should continue into 2008.
The core inflation rate, which excludes volatile foods, municipal rates and monetary policy changes, was, however, up at a slightly slower 5,6% year on year (y/y) in July from 5,7% y/y in June.
While this is off the highest level since August 2003 — of 6% y/y set in May — it is still too close to the upper limit of the target for comfort and does not indicate a significant dip in broader-based inflation, recently highlighted by the central bank as a concern.
The Reserve Bank noted on August 16 in raising the repo rate by 50 basis points to 10% that CPIX inflation is now expected to remain above the upper level of the inflation target range at an average of about 6.3% before declining to within the inflation target range in the second quarter of 2008.
It is likely this reading of the conditions was correct.
Some bond dealers did not read it quite so well, and the market gave back close to ten basis points after some players had expected an easing in inflation and positioned themselves accordingly.
The key concern in the July data was a lofty increase in food inflation to 10,2% y/y from a still-high 9,5% in June. This makes up a weighting of 25,66% in the basket and remains a serious cause for concern.
High-flyers in this category were grain products (up a whopping 14,3% y/y), milk, cheese and eggs (13,6%) and meat (10%). Other notable areas contributing to the high CPIX were electricity costs (8,5%) and an increase in rates and taxes, which charged the housing component at 6,4% y/y.
While goods and services inflation clearly remain key drivers of prices, it is also important to note that some of the key services inflation sectors also remain elevated.
The personal care component in July shot up to 6,5% y/y from 6% before, while household operation remained elevated at 7,6% y/y.
This data will not be viewed comfortably by the central bank or the markets. — I-Net Bridge