Electricity, Municipal tariffs and Insurance prices keep CPI above 6%

Prof. Chris Harmse, Chief Economist, Dynamic Wealth

Analysis

The increase in the CPI continued its declining trend in July to 6.7% from 6.9% in June and rates above 8% during the previous months. Indications are that this trend will continue as more and more products are registering a reduction in prices compared to the previous month.

However, three items with a combined weight of 12.89% in the CPI-basket are keeping the rate of increase in the CPI above the level of 6%. Excluding insurance (weight of 7.71%), water and assessment rates (3.31%) and electricity tariffs (1.87%) from the basket, the rate of increase in the CPI would have slowed from 6.44% in June to 5.74% in July.

Insurance premiums increased 3.1% on a month over month basis and 10.5% year over year. The similar increases for water and assessment rates were 8.8% and 9.1%, whilst that for electricity rates was 21.5% and 27.4%. However, as the monthly increase in electricity rates was lower than the 22.7% last year, the year over year increase was smaller than the 28.6% of last year.

The CPI of the BIG FOUR, with a combined weight of 50.34% in the CPI basket, declined further to 6.3% (see Table 1) from 6.7% in June. Prices of food and non-alcoholic beverages, as well as of vehicles, declined by -0.4% and -0.3% respectively from June to July. Rentals were not surveyed whilst that of insurance increased as explained above.

Table 1: Increases in big four items slower than the rest of the CPI basket

Another indication of the declining trend in the CPI is the increase in the number of products whose prices are declining on a monthly basis. Whereas products with a combined weight of 13% in the CPI-basket declined from December 2008 to January 2009, this number doubled to 26% between June and July. However, this number is probably blown up a bit by the decline of -0.5% in the category for purchases of vehicles with a weight of 11.25%. Prices of used vehicles are declining (weight of 3.85%), whilst that of new vehicles is probably still increasing.

Conclusion and interest rate outlook

September is the month marked out for the increase in the CPI to move below the level of 6%. Whether this will be a prolonged decline or short term dip will largely depend on developments in the labour and commodities markets.

Though pretty large increases in salaries and wages were granted, it is also accompanied by job losses (already 475 000 during the first half of 2009 and still counting) which will bring some productivity improvements and as such reduce price pressures.

A return to real economic growth in especially the developed world will unfortunately also place upward pressure on commodity prices such as oil. This might outstrip the strengthening bias of the rand on petrol prices and as such put upward pressure on the CPI.

However, if the upswing in South Africa lags the world by more than a quarter, weakening demand might delay the expected uptick in the CPI.

Against this background the MPC will have room for more reductions in the repo rate. Whether they actually do it, is entirely another story.