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Locked on inflation: The treasury has its eye on the target

23 October 2008 Betterbond

The inflation target band will remain unchanged at 3%-6% according to finance minister Trevor Manual. In January 2009, however, the measure of inflation will change from the current CPIX inflation to headline CPI. This should bring about a lower inflation rate.

Deon Lessing (pictured), marketing director of Betterbond says: “Mortgage interest rates will be replaced with owner’s equivalent rent. Mortgage interest rate changes directly affect the measure of housing costs, which is why they were previously excluded from the target measure of inflation. The new measure will enable the cost of housing to be represented in the target measure. Inflation on necessities such as food and petrol are inescapable, which has repercussions on consumer spending. It’s simple: rising inflation erodes household spending. The re-based headline CPI will bring down the inflation rate in 2008, partly due to lower expenditure weights on these necessities. Even though food and petrol prices are now dropping, the weaker rand has, to some extent, cancelled the effects on this.”

The current CPIX is based on expenditure patterns in 2000, whereas the headline CPI will be measured on the household income and expenditure survey of 2005/2006. Spending patterns have dramatically changed. Consumers have been hit with an accumulative 500 basis point interest rate hike since 2006, which lead to consumer spending declining. Soaring inflation rates reached a record high of 13.6% year-on-year in August, and this coupled with slowing income rates, has left consumers tightening their belts.

“Although we may be through the eye of the storm, we are still in for tough times ahead. It is important not to panic as fundamentally the South African market is still strong. Next year we will not see growth as we did between 2004 and 2007, but we are still far from recession. Consumers should not make harsh decisions like selling their property, but rather revise their budgets and weather the storm. Look for cheaper options on things such as insurance products. Competing companies are likely to give you a better deal to acquire your business, especially in the current economic climate,” adds Lessing.

Manual advised that consumer inflation had been outside the target band for the last 15 months and inflation targeting will remain the anchor for the monetary policy.

Although navigating through this tough economic environment will be a challenge, the government will continue to expand and improve public services, investing in the infrastructure required for growth.

“Although the first half of next year may still be affected by past interest rate hikes, the new measure should bring the inflation rate back towards the target, which will bring about interest rate cuts. The sentiment is that interest is currently returning to the property market, however, rate cuts will accelerate the market recovery period. South African consumers are better off than those in the US, who have a debt to income ratio of over 130% due to lax credit regulation. The introduction of the National Credit Act has helped the South African consumer prepare for the current global crisis,” Lessing concludes.

***The information contained in this press release provides general guidance. It is not intended to constitute substantive information and cannot replace the specific advice which should be sought from an appropriate professional advisor in relation to the actual facts of a matter, before taking any particular course of action.

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