CPIX: Pace of price increases may accelerate further

Administered prices causing havoc

CPIX July: 13.01% (year-on-year) vs June 11.56% (Consensus for July 13.2%)
CPIX July: 2.5% (month-on-month)

CPI July: 13.4% (year-on-year) vs June 12.2% (Consensus for July 13.4%)
CPI July: 2.1% (month-on-month)

Hefty administered price increases were the main reason for the increase in CPIX to shoot up to 13% in July. Administered prices increased by 21.33% in July compared to 16.01% in June. The main contributors to the increase in the administered price index were petrol prices, which increased by 75c/l, electricity tariffs and municipal assessment rates.

The bad news is that more increases in electricity tariffs and assessment rates are on its way. Only the City of Cape Town’s increase of 35.9% (implemented in July) should be fully reflected in the numbers. Other metropolitan areas such as Johannesburg and Ekhurhuleni implemented an increase of 12%. Johannesburg’s further increase of 20.6% will only be incorporated in August, whilst Ekhurhuleni will effect a similar increase in October.

Nevertheless, these increases were enough to cause the Fuel and Power sub-index to increase by 23% between June and July. As a result the inflation rate of this sub-index shot up from 9.6% in June to 23.9% in July (according to the CPIX index).

The increase in assessment rates caused the Housing sub-index to increase by a large 3.2% between June and July. Excluding administered prices, the CPIX increase is 10.7%, up from 10.4%in June.

Statistics South Africa indicated that due to the staggered implementation of electricity tariff and assessment fee increases by different municipalities, additional price surveys for these two items will be conducted till year end.

Other prices

Food prices, which increased by 18.5%, were responsible for 40% of the increase of 13% in CPIX. However, judging from PPI numbers, the pace of increase should subside.

However, the PPI numbers also indicate that lots more of inflation is still to come. In addition, second round effects are becoming larger. In this respect, interest rate sensitive inflation increased by 7.33%, up from 6.8%. Non-interest rate sensitive inflation jumped to 19.8% from 17.2%.

Outlook

CPIX may experience pressure to increase further in August and September due to electricity tariff and assessment rate increases. However, the drop in the petrol price of 27c/l-30c/l in August and further possible drop of R1/l in September will counter these pressures. As the Reserve Bank expected CPIX to peak in the third quarter, interest rates are expected to stay on hold.