Another interest rate increase imminent
The increase in the CPIX to 6.4% in May from 6.3% in April makes the probability of another increase in the repo rate in August quite high. The May numbers show that the price pressures in the economy are finding its way to consumer prices. And chances are good that the CPIX might peak closer to 7% than 6%. In order for this not to worsen, monetary policy will need to be tightened through an increase of at least 50 basis points in the repo rate at their meeting in August.
The May numbers, which was released by Stats SA on Wednesday, shows:
* larger price pressures than anticipated by the authorities;
* consumer prices are increasing on a wide range;
* supply pressures are on a wider scale complementing demand price pressures.
Larger price pressures
The Reserve Bank anticipated the CPIX to reach its peak at 6.3%. At 6.4% it is already higher than this number. Chances are that CPIX might increase by close to 7% if the Reserve Bank does not act in further cooling of the demand side of the economy. Note that an increase in interest rates has its largest impact on prices immediately.
CPIX shows price increases on a wide range
It is not only petrol and food that causes the CPIX to increase. In May last year, when the year on year increase in the CPIX was 4.1%, 10 of the 33 price categories with a combined weight of 20% in the CPIX index were in a state of disinflation (prices decreasing). In May this year, only clothing and footwear shows disinflation.
For example, communication with a weight of 3.19% in the CPIX showed disinflation of 2.4% in May last year. This changed around to inflation of 0.3% in May this year. Disinflation in recreation (with a weight of 3.39%) of 0.1% changed into inflation of 0.8%. For vehicles with a weight of 5.69% the disinflation of 0.4% changed into inflation of 0.2%.
Another indication of price increases occurring on a wide front, is the CPIX without food and petrol. In June last year the year on year increase in the CPIX was 2.5%. This number increased from 2.9% in June last year to 4.5% in April and stayed there in May.
Supply side pressures are building
Supply side factors are emerging on a large scale as a driving force of CPIX.
* Increases in unit labour costs (ULC) due to higher increases in compensation to employees than increases in productivity are pressurising the CPIX to stay on the high side. According to the latest Quarterly Bulletin of the South African Reserve Bank, ULC increased to 5.9% in the fourth quarter of 2006 from 5.2% in the third quarter. Indications from the latest Quarterly Employment Statistics of Stats SA points to ULC increasing to above 6% in the first quarter, whilst the higher than expected salary increases across the different economic sectors will keep this number high.
* Input costs will suffer pressure from oil prices which will not recede abruptly in the near future. In addition proposed increases in electricity prices of 18% will add to cost pressures.
* The international price of food will due to a shortage of supply stay high.
Share market taking a knock
Given the higher than expected trend of inflation, as well as international market jitters, the current downward correction on the JSE is likely to continue over the next few months. In the light of another o.5% increase in the repo rate in August, especially financial and industrial shares are expected to move downward. Since the announcement of the "shocking" inflation data at the end of May 2007 (when inflation X broke through the 6% level in April 2007)the financial index on the JSE already had lost more than 2000 points or 7.6%.
