/ 3 February 2009

New inflation index lower, offers hint for rates

South Africa’s price growth was lower in December under a new, re-weighted index, though the fall was less than expected, offering a note of caution for a central bank meeting on interest rates.

The Stats SA data comes as it switches to the new basket as of January this year, dumping CPIX, the previous measure which stripped out mortgage costs. The change is seen leading to a broader fall in headline inflation.

The office’s indicative data for January to December of last year, showed growth down 0,9 percentage points from the equivalent CPIX measure. The first year-on-year figure will only be released in late February.

But government bond yields jumped after the release, with some traders expecting a bigger drop in the revised index. The yield on the 2015 bond rose to 7,445% at 10.15am GMT, compared to 7,37 before.

”The drop looks quite a bit less than expected, though we are still waiting to get our hands on the full time series,” Peter Attard Montalto, emerging markets analyst at Nomura, said.

”We continue to believe that inflation will come down more slowly than the median expectation … and this higher base should further support this case.”

Some economists say the new weightings will cut the headline number in January by about two percentage points, opening the way to more aggressive cuts in rates by the central bank.

The statistics agency said the rate of change from January to December 2008 in the new headline index was 7,7%, compared to 8,6% in the previous CPI index.

”The lower rate of change in the new index confirms the expectation expressed in Stats S.A. … that the re-weighting would result in a decrease in the level of measured inflation,” the agency said in a statement.

The central bank meets on Thursday.

Pump prices dive
Stats SA will give the first year-on-year figure later this month for inflation under the new basket, which also cuts the weighting for food — a key driver of faster inflation.

”We are going to have to see the month-on month figures but it is really not that out of line, we are still expecting inflation to be lower in 2009,” said Elize Kruger, economist at Thebe Securities.

”Our forecasts are now complicated by the survey schedule, so much has changed … I still say due in part to lower petrol prices and the effects of the re-weighting, we are expecting lower inflation numbers in January.”

Domestic fuel prices fell 18% last month.

The central bank has forecast inflation to return to its 3% to 6% target range in the third quarter of this year.

A Reuters poll forecast the central bank to cut rates by 100 basis points on Thursday, adding to a 50 basis points cut in December which was the first in more than three years.

CPIX inflation peaked at 13,6% year-on-year in August 2008, but eased to 10,3% in December. – Reuters