Consumers braced for inflation to increase

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Statistics South Africa will release the consumer price index (CPI) for last month on Wednesday, 15 January.

Consumers have been warned to expect higher inflation this year as the weaker rand's effects on imports are set to be more pronounced. Higher inflation reduces the buying power of disposable incomes and offsets the benefits of 40-year-low interest rates.

Inflation was generally contained in the first two months of the fourth quarter of last year‚ at 5.5% in October and 5.3% in November. But petrol prices increased by 17c/l last month‚ which will have added upward pressure on inflation. Increases in the cost of domestic worker wages‚ rentals and public transport will also have added pressure on inflation.

A BDlive consensus forecast from a survey of 13 economists was for inflation to rise to 5.5% year on year in December.

"An important forecast risk around inflation for December is the quarterly rental inflation survey‚ for which we expect more or less unchanged inflation pressure to before‚ but there might be some upside risk to this assumption‚" Macquarie SA economist Elna Moolman said.

Food prices are seen as having put less pressure on inflation‚ although this is expected to change in the months ahead. This is because the rand has weakened drastically recently‚ raising the prices of key commodities such as maize and fuel. Higher food prices will be among the factors likely to cause inflation to breach the upper end of the targeted 3%-6% band this year‚ according to Vunani Securities economist Ilke van Zyl.

"Our forecast trajectory shows a steep acceleration to above 6% in 2014‚ where it will remain for the remainder of the year as food inflation in particular turns around‚" she said.

The Reserve Bank will be closely monitoring inflation developments and drivers‚ as this will be among the main topics of discussion at its monetary policy committee meeting later this month.

Speculation is mounting that if inflation rises and remains above expectations while the economy grows more than expected‚ the Bank could hike interest rates sooner than projected. Most forecasts are for interest rates to be raised in the fourth quarter of this year‚ while a handful of analysts still believe this will only happen in the first quarter of next year.

More indications of where economic growth is headed over the next few months will be revealed in the Bank's leading indicator‚ due on Tuesday. The leading indicator has increased only marginally during most of last year‚ suggesting that economic growth would have been pedestrian compared with 2012. It is expected to have improved slightly in November from the 0.2% increase in October.