Interest rate insensitive inflation tops 12% in December

Though South Africa’s CPIX deteriorated more than market expectations in December, the increase of 8.6% was in line with Dynamic Wealth’s expectations.

The sharp jump from November’s 7.9% ensured the average CPIX for 2007 to top the inflation target of 3% to 6%. Average CPIX for 2007 was 6.3% - up from the 4.7% in 2006. And the possibility exists that the result might be even worse this year.

Back to December’s results, CPIX was again driven by interest rate insensitive prices. These prices, which comprise administered (mainly government determined) and food prices, increased from 11.7% in November to 12.3% in December. And was five percentage points higher than the increase of 7.3% in January last year. This should be a clear signal to the Monetary Policy Committee that interest rates should not be increased further.

In contrast demand side inflation, which can be controlled by interest rates, was at 5.05% still in the inflation target band. The increase was however higher than the 4.3% in November. The main reason for this jump can be ascribed to a low base of calculation in December last year.

The drivers of CPIX in December was food prices (up 13.9% from a year ago), a large increase in the petrol price, the housing component (assessment and rental costs) which increased 6.4%, fuel and power which continued its trend above the inflation target at 8.4% and household operation (mainly influenced by domestic worker wages) up at 8.3%.

Concerning CPIX for 2008, the level of 9% is certain to be breached for the first time since 2003. And the rate of increase is set to stay high despite a high base of calculation.

Apart from the normal drivers such as food and petrol, higher medical and education price increases will put upward pressure on the CPIX. So will the new calculation method for clothing and footwear which is set to kick in from January 2008 and probably bring and end to deflation in this category.

And the increase in electricity prices which is set to kick in during the first half of this year will have a direct and indirect impact on the CPIX. Direct, as the price increase of 14.2% will push CPIX higher - and indirect as electricity prices (and power sharing) will impact production of all products and put pressure on second round inflation to emanate strongly.

Should this problem continue it will add to the pressure for CPIX to stay high in ensuing years.