Dynamic Wealth: CPIX comments

The Numbers

CPIX: January 2008: 8.8% (yoy)

CPIX: January 2008: 1.2% (mom)

CPI January 2008: 9.3% (yoy)

CPI January 2008: 1.1% (mom)

Comments:

At 8.8% CPIX for metropolitan and other urban areas for January increased above the market consensus of 8.4%. This higher increase is in line with Dynamic Wealth’s expectation, says prof. Chris Harmse, chief economist of Dynamic Wealth

One reason for the above consensus increase stems from the new price collection method of clothing and footwear prices – an issue Dynamic Wealth took up with Stats SA last year and which has been implemented in the January numbers.

Under the new method, discount sale prices are not taken into account anymore when comparing prices, Harmse explains. As a result the clothing and footwear category changed from deflation in December to inflation in January. Whereas this category subtracted from the inflation rate in the past - contributing to a “lower” rate of increase - this benefit is no longer in existence. The clothing and footwear index for January shows a year on year increase of 0.6% compared to the decrease of 7.1% in December.

Other prices contributing to the above target increase include food prices which increased by 13.6% (13.9% in December), cigarettes and tobacco up 9.8% (9.5%), housing up 6.6% (6.4%), household operation up 8.6% (8.3%), transport up 10.3% (11.3%) and medical care up 5.7% (5.5%).

When dividing the increase into interest sensitive and non-interest sensitive inflation, a new trend emerged. Harmse says whereas non-interest rate inflation (administered and food prices) continued to trend higher to 12.3% in December, driving the CPIX upwards, this index increased at a slower pace in January at 11.95%. However, interest rate sensitive inflation jumped in January to 5.7% from 5% in December – also as a result of the new clothing and footwear pricing methodology.

It is expected for this trend to continue in February and for the CPIX to breach the 9% mark. In fact, the CPIX for the total country already registered 9% in January. Harmse says CPIX will be kept high during the course of the year due to electricity prices increases, high fuel and food price increases, higher municipal rates including municipal property taxes and a further increase in education prices.

However, another increase in interest rates is not expected. Especially as consumer demand indicators such as retail and vehicle sales and credit extension to individuals are slowing down at a fast pace. In addition, bad debt numbers are increasing showing consumer finances under pressure.

The rate increases are working and should now been given time to work its way through into the CPIX, which should move into the target band by the end of this year or early next year.