South Africa’s targeted annual CPIX inflation quickened to a new five-and-a-half year high in May, data showed on Wednesday, slightly above forecasts and hardening the case for higher interest rates in August.
Statistics South Africa said CPIX accelerated to 10,9% year-on-year from 10,4% in April, while the headline figure jumped to 11,7%, compared to the previous 11,1%.
CPIX inflation — which removes mortgage costs from consumer inflation — has remained above the central bank target of 3% to 6% since it breached it in April 2007.
The central bank raised the repo rate by 450 basis points to 11,5% between June 2006 and April this year, and added another 50 basis point rise earlier this month.
Food was, again, a major driver of inflation, surging 17% year-on-year, from a previous 15,7%, but even more pressure will come this year from rising fuel costs and a sharp rise in electricity tariffs in July.
”The key drivers were higher food and petrol prices, as usual,” said Annabel Bishop, economist at Investec.
”The substantial hikes in electricity tariffs [from July 1] means CPIX inflation is likely to peak above 12% in Q3 2008, regaining target only in 2010.”
The national electricity regulator has given state power firm Eskom permission to raise prices by an average 27,5% for 2008/09.
Motorists could be in for another increase of about 7% in fuel pump prices next week, which would bring increases to between 42% and 56% so far this year.
More hikes beyond August?
Without the impact of higher electricity prices, the central bank sees CPIX coming back to target in the second half of 2010 and Governor Tito Mboweni said last week there were ”painful” measures ahead to deal with inflation.
Analysts said with inflation likely going higher in the next few months, an August rate rise was probable, while some are starting to look for more.
”Inflation continues to trend higher and it’s going to continue doing so for the next four or five months,” said Russell Lamberti, economist at ETM.
”Certainly, I think, it definitely confirms another interest rate hike in August and, at this stage, we would be looking for further monetary tightening after that in October.”
But some say the market may be hesitant to price in a rate hike in October, after the central bank only raised the repo rate by the usual 50 basis points earlier this month, despite hawkish comments, suggesting growing concern about slowing growth.
”We would be surprised to see the market move to aggressively price in a further interest rate hike beyond August given, in some ways, the mixed message from the Reserve Bank, but inflation itself is very worrying,” said Jeff Gable, head of research at Absa Capital.
Economic growth is cooling on the past rate increases and power shortages, and some analysts fear an extended tightening cycle could strangle it into recession.
Market reaction was muted, with the data largely in line with expectations. The rand was little changed at 7,98 against the dollar at 11.35am GMT, while the yield on the 2015 bond was also steady at 10,63%.
Carmen Altenkirch, economist at Nedbank, said the figure was ”quite nasty”.
”I imagine it’s the usual suspects, food and fuel prices. Going forward I think inflation will remain in the double-digit territory for much of the year and the electricity tariff increase will about do that. Overall the picture is not looking good.”
Geoge Glynos, economist at ETM, said: ”A disappointing figure again despite it being a low measurement month. The figures confirm what Reserve Bank Governor Tito Mboweni has been saying about inflationary pressures being now more broad based. We are anticipating at least one more rate hike, perhaps even two, of a half a percent each.”
Annabel Bishop, an economist at Investec Group Economics, said the key drivers were higher food and petrol prices.
”The substantial hikes in electricity tariffs means CPIX inflation is likely to peak above 12% in Q3.08, regaining target only in 2010.
”Publication of economic data showing the slowdown in the economy may stay the SARB’s hand at the next MPC meeting, but on balance we fear that they will opt for a last hike [50bp in August].” – Reuters, I-Net Bridge