July CPIX records at an all time high 13%

The year-on-year increase in the CPIX for July 2008 was 1.4 percentage points higher than the 11.6% y/y increase recorded at June 2008, reported Statistics South Africa on Wednesday, 27 August 2008.

This is the 16th month running that CPIX has been above the Reserve Bank's 6% upper inflation target limit.

The previous all-time high before June this year for CPIX was the 11.3% set in 2002.

Contributing factors

Stats SA said the annual increase 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 (+5.1 percentage points), transport (3.2 percentage points), fuel and power (1.1), housing (0.9), household operation (0.7), medical care (0.6), education (0.4) and personal care (0.3).

The increase in the Consumer Price Index (CPI) for the historical metropolitan areas was mainly due to relatively large annual contributions in the price indices for food (+4.3 percentage points), transport (3.5), housing (2.3), fuel and power (0.8), housing operation (0.6) medical care (0.6), and education (0.4).

Annual CPIX for 2007 was at 6.5% from the 4.6% in 2006, while annual CPI was at 7.1% from the 4.7% in 2006.

Economists had believed that the CPIX, which is used by the central bank for its inflation target, would be 13%, raising hopes of rate cuts next year.

The bank left the repo rate at 12% in August on the better inflation outlook, halting an upward cycle that saw rates rise 5 percentage points over two years.

"The figure is broadly in line with our expectations ... It just reflects a very strong growth," Econometrix Treasury Management (ETM) Market Analyst George Glynos told BuaNews.

Reached the peak?

According to Glynos this could be the peak in inflation, depending on the kind of petrol price cut that we see for the September figure.

Economists believe that inflation will continue rising until the new consumer inflation basket is introduced in January.

Replacing mortgage rate

The new CPIX basket will result in some items used to measure inflation being excluded or having a lesser effect on the CPIX weight.

"Next year's re-weighting exercise will result in a lower level of consumer inflation.

"In addition, the mortgage interest rate component of CPI will be done away with, replaced by the income which can be charged for renting homes instead of living in them," Investec Economist Annabel Bishop told BuaNews, adding that CPIX inflation would potentially fall away.

Whether CPIX inflation would be replaced by CPI inflation as the targeted measure is uncertain but the new measure to be targeted is likely to be announced at November's Medium-Term Budget Policy Statement (MTBPS), continued Bishop.

"We expect no more interest rate moves this year," she said, adding that the sharp drop in the level of inflation in 2009 is likely to cause the SARB to cut interest rates significantly, beginning with a 50bp easing at the April MPC meeting.

Further the potential cut of R1 a litre is being scheduled for September, which will provide much relief to the inflation outcome in that month.

Article published courtesy of BuaNews