CPIX distorted by clothing and footwear

June's CPIX numbers virtually sealed another increase of 50 basis points in the repo rate in August.

Despite a slowdown in credit granted during June as a result of increased interest rates and the impact of the Consumer Credit Act, CPIX still increased by 6.4% compared to a year ago. Prof. Chris Harmse, chief economist of Dynamic Wealth, says this point to the fact that price increases are not only demand driven, but that supply forces stemming from production price increases are also starting to play a role in retail price pressures.

In addition, the numbers show that price increases are becoming even more broad based by the month an issue the Reserve Bank wanted to avoid with the five interest rate increases since June last year. The following points illustrate that the increases are becoming broad based.

Firstly, eight of the 17 product groups increased by more than 6% in June compared to seven in May.

Secondly, the CPIX without food and petrol increased by 4.6% in June compared to 4.5% in May and 2.5% in June a year ago.

Thirdly, CPIX without running costs (mainly petrol) increased by 6% compared to 5.8% in May and 3.8% in June 2006.
 
Another point Harmse makes, is that price increases are in fact more severe than depicted by the numbers. The CPIX numbers are distorted by clothing and footwear deflation. Prices in this product category is declining unabatedly according to Stats SA. He says the CPIX without clothing and footwear was 6.8% in June compared to 6.7% in May and 4.4% in June 2006.

Regarding the future, Harmse says that CPIX for July might come in below 6%, but only just and this is mainly because of a high base of measurement in July last year and the declining petrol price. The petrol price might be reduced by 20c/l in August, which is also positive for Augusts inflation number.

However, factors such as still high credit extension, high electricity price increases and high salary increases will keep the CPIX high. Though the stronger rand might weaken the impact on the CPIX via lower import prices, Harmse says the Reserve Bank should not rely on the rand to keep increases in the CPIX under control. This is because the Reserve Bank is not targeting a specific level of the rand, but CPIX.