September's CPIX in at 6.7%

According to Statistic South Africa (Stats SA), the September headline inflation rate or annual rate of change in the Consumer Price Index (CPI) for metropolitan areas was up 7.2% y/y compared to a 6.7% increase in August.

Director and Senior Economist at Econometrix Tony Twine, told BuaNews on Wednesday: "We have not even seen the peak of this inflationary cycle yet. Today's data is clearly a step towards that peak."

Twine explained that half the increase witnessed in the inflation data is due to petrol prices falling a year ago.

He said 0.2 of a percentage point out of the 0.4% increase has come through from base effects from the fuel price which was declining last year.

With regard to the rising price of food, Twine said: "We are likely to see an increase in food prices at least until the first quarter of next year, where the base effects from this year will help with a moderation in the rate of food inflation.

Despite skyrocketing global oil prices, Twine believes that the fuel price increase scheduled for 7 November will not be a dramatic one.

"We have been over-recovering slightly for all fuel products for about 10 days of the month, and so even if we then under-recovered for the remaining days, the difference will be a couple of cents up or down," he explained.

Counteracting factors to the CPIX increase was the price indices for clothing and footwear which have been "a consistent downward influence on prices and inflation for more than a decade now," said Twine.

When South Africa opened up its economy in 1995, foreign companies swamped the local clothing and footwear industries causing them to consistently combat price falls in the industry.

He highlighted that imported goods which are produced at a cheaper cost have displaced local producers.

Twine explained that consumer spending is still in positive territory and that positive growth has been relatively substantial.

Stats SA shows that the annual increase of 6.7% in the CPIX for historical metropolitan and urban areas was mainly due to rising price indices for food, housing, medical care and health expenses, household operations, transport, fuel and power, education and household operations.

September's inflation data is likely to further push the South African Reserve Bank into the spotlight after the repo rate was raised by 50 basis points to 10.5% earlier this month, causing banks to raise their interest rates to 14% from 13.5%.

In effect, the Monetary Policy Committee has raised the repo rate by 350 basis points or 6.5% since the country's inflationary cycle began in June 2006.

Reserve Bank governor Tito Mboweni said inflation should peak at around 6.8% in the first quarter of 2008, where after it is then expected to fall back within the bank's inflation target band of 3 to 6% by the second quarter of that year.

While there is speculation that the committee will again raise the repo rate when they next meet in December, Twine said, "It is more than possible given that the bank was willing to raise the repo rate in October, that they will be willing to raise it again in December.

"There were some economists, who believed that data in the real economy was significant enough for the bank to sit on their hands," he said.

Article published courtesy of BuaNews