May CPIX seen at new five-and-a-half-year high

South Africa’s targeted CPIX inflation is seen accelerating to a new five-and-a-half-year high in May on persistently high food and fuel prices, a Reuters poll showed on Friday.

Fourteen economists surveyed said CPIX inflation will likely surge to 10,8% year-on-year from 10,4% in April, while it was seen slowing to 0,9% on a monthly basis.

Headline CPI inflation was expected to accelerate to 11,4% year-on-year and slow to 0,9% month-on-month because May was a low survey month in which prices of education, public transport, insurance, to name but a few, are excluded.

The central bank has raised the repo rate by five percentage points to 12% since June 2006 to try and arrest inflation, which has persisted outside its 3% to 6% target since April 2007.

Analysts said the inflation outlook remained bleak.

”The risks are to the upside given strong but still-emerging second round effects,” said Peter Attard Montalto, analyst at Lehman Brothers, adding food inflation may have peaked on a year-on-year basis.

Food inflation jumped 15,7% year-on-year in April while fuel prices went up by 54% in the year to May.

Risk from electricity
Higher electricity prices are expected to keep the pressure on over the next few months, after the National Energy Regulator of South Africa (Nersa) gave state-owned power firm Eskom the go-ahead to raise its prices again.

”The decision by Nersa to allow Eskom a total 2008 increase of 27,5% … will still add significantly to the costs of doing business,” said Luke Doig, senior manager of investment and economic services at Credit Guarantee.

PPI was seen dipping to 12,3% year-on-year and slowing to 1,3% on a monthly basis.

”More shocks could see PPI approach 15% with dire implications for consumer inflation,” Doig said.

Danelee van Dyk, economist at Standard Bank, said given higher electricity and property rates in July, CPIX would peak above 12% in the third quarter.

”We expect it to remain in double-digits until the first half of next year and go back in single-digit territory in the second half and stay outside the target band till the second half of 2010”.

With that bleak inflation outlook, at least one rate hike is on the cards for August.

”Rates are not going to come down as soon as June 2009, as we expected. We are pricing in a cut only from August next year and the central bank will keep inflation rhetoric tough,” Van Dyk said. – Reuters

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