December CPIX up more than 8%

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 8,6% year-on-year in December from 7,9% in November, Statistics South Africa said on Wednesday.

Annual CPIX for 2007 was reported at 6,5% from 4,6% in 2006, while annual CPI was at 7,1% from 4,7% in 2006.

The CPIX was up 0,7% month-on-month after it increased by 0,5% in November.

This is the ninth month running that CPIX has been above the Reserve Bank’s 6% upper target limit and will be a factor to consider when the bank meets on interest rates on Thursday.

Headline consumer prices—the 12-month rate of change in the CPI for metropolitan areas—was up 9% year-on-year in December from an 8,4% increase in November.

The core inflation rate, which excludes volatile foods, municipal rates and monetary policy changes, was up 7,8% year-on-year in December from 6,9% in November.

The CPIX was expected to increase to 8,5% year-on-year, an I-Net Bridge survey found. Notably, exactly half of the 12 economists surveyed pegged the growth rate at 8,5%. Forecasts ranged from 8,2% to 8,5%.

The CPI was expected to have increased to a growth rate of 8,9% year-on-year.

Statistics South Africa said the annual increase of 8,6% 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 (3,8 percentage points), transport (1,7 percentage points), housing excluding interest rates (0,8), household operations (0,5), medical care and health expenses (0,5), fuel and power (0,4), education (0,4) and personal care (0,2).

These increases were slightly counteracted by decreases in the price indices for clothing and footwear (-0,2 of a percentage point).

The annual increase of 9% in the CPI for the historical metropolitan areas was mainly due to relatively large annual contributions in the price indices for food (3,1 percentage points), housing (two percentage points), transport (1,9), medical care and health expenses (0,5), household operations (0,4), education (0,4), and fuel and power (0,3).

These increases were slightly counteracted by annual decreases in the price indices for clothing and footwear (-0,2 of a percentage point).

Fanie Joubert, economist at Efficient Group, commented: “It’s slightly above expectations. But given the turmoil in the financial markets and Eskom’s power crisis, I think there’s still a strong bias for interest rates to be left unchanged tomorrow [Thursday].”

Said Mike Schussler, economist at T-Sec: “The figures still came in higher than expected, and it’s not going to be good for the bond market. This is not what South Africa needed, and it looks like CPIX will peak at 9%. I doubt this will be good for equities and the rand.”

The figures are in line with expectations, said Ridle Markus, economist at Absa. “I still think we will see a peak in CPIX inflation at around 9% in February. It will be a very difficult call on interest rates for the South African Reserve Bank at the MPC [monetary policy committee] meeting tomorrow”.

Razia Khan, economist at Standard Chartered Bank, said: “We are in a new place as far as inflation goes. This is an awful print, given especially that December is usually a quiet survey month.

“It is the next inflation release—for January—when we are likely to see all of the usual new-year price increases kick in, and that is not looking pretty.

“CPIX in 2007 averaged 6,5%. We expect the average in 2008 to be significantly higher. As well as the usual food-related pressures, the rise in electricity tariffs will not help. Although the survey data will only be seen later in the year, we could see sympathy pricing and a more pronounced secondary impact at the outset.”

Regarding the implications for monetary policy, Khan said: “We have now changed our SARB view from a definitive tightening to rates being on hold in January. The reason? The energy crisis pulls the rug out from underneath the economy, and its effect is much more immediate than conventional monetary tightening.

“Eskom’s only near-term solution to the crisis is to curb consumption of electricity, but there is a direct correlation between electricity consumption and growth. Switch the lights off, and the economy takes an immediate hit. This is a supply-side shock. There is no point in even attempting to react with interest-rate policy.

“Yes, CPIX now looks like it will peak above 9%. But further interest-rate tightening in the face of very real downside risks to growth will be ineffectual. This is a very tough position to be in, but rates look to be on hold now. Perhaps the SARB even needs to think about easing, but the inflation trajectory will not allow for that to happen soon. Risks to the currency may also be elevated.”—I-Net Bridge

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