Lower CPIX confirms rate cuts, but high food prices a concern

The Numbers

CPIX December 2008: 10.3% (year-on-year) vs November 12.1%
CPIX December 2008: -0.9% (month-on-month)
CPIX Average for 2008: 11.3% vs 6.3% in 2007
CPI December 2008: 9.5% (year-on-year) vs November 11.8%
CPI December 2008: -1.1% (month-on-month)
CPI Average for 2008: 11.5% vs 7.1% in 2007

Introduction
More interest rate relief for indebted consumers will next week be announced by the South African Reserve Bank following Statistics South Africa’s announcement of sharply lower rates of increase in both the Consumer Price Index (CPI) and the Inflation Target Index (CPIX) for December.

However, the continual high rates of increase in food prices remain a concern as the benefits of lower international food and oil prices are not registered in retail prices. Food inflation increased to 17.1% in December from 16.6% in November. Though it will be difficult to enforce, the government should consider an investigation by the Competition Commission in the whole food sector.

Analysis of CPIX
Good news for consumers is the decline in both the interest rate controllable- and non-interest controllable CPIX rates for December (Figure 1 and Table 1).

Lower interest rate controllable inflation at 7.96% (from 8.27%) was assisted by unchanged monthly rates in the indexes for household operation and personal care (with a combined weight of about 10% in the CPIX-index).

Non-interest rate controllable CPIX was sharply down to 13.15% (from 16.63%) mainly on account of the sharp drop of R1.61/l in the price of petrol which reduced the rate of increase of the running cost index to 1.3% from 20.6% in November.

Table 1

A steep increase of 16.8% in the CPIX food price index however kept the rate of increase in non-interest rate controllable inflation above 10%.

Though the year on year rate of increase in processed food prices (according to the CPIX-index) was high at 20.3% in December (0.2% month on month), the sharp month on month increase of 1.5% in unprocessed food prices (12.9% year on year) is of concern. The sub-index for meat (with a weight of 6.95%) was up 1% on a month on month basis, whilst vegetables (with a weight of 2.43%) registered a very high month on month rate of increase of 3.3%. The same rate of increase for fruits and nuts was very high at 4.2%.On a year on year basis the index for grain products registered the highest increase of 33.4%, followed by fats and oil with 27.6% and coffee, tea and cocoa at 21.6%.Figure 1

Interest rate- and non-interest rate controllable inflation trending down

 (Click on image to enlarge)

Inflation outlook

Next month will see the CPIX being replaced by the CPIU (Consumer Price Index for Urban areas) as the inflation target measure. Though very difficult to estimate due to product, weighting and methodological changes, the CPIU for January may drop to between 7% and 8% on account of the drop of R1.34/l in the petrol price and lower rental rates (with a weight of 16% in the index). It will however be interesting to note the increase in food prices from a high base. Should high increases in food prices continue, an investigation by the Competition Commission into pricing in the whole food sector should be considered.

Interest rates

The inflation numbers for December as well as the outlook for 2009 vindicated the Reserve Bank’s decision to reduce interest rates in December. As the CPIU will during the course of 2009 fall back into the target range of 6% to 3%, another reduction of 50 basis points in the repo rate in February is a certainty. However, due the current concerns on food prices and an expected recovery of world economic growth late this year – which will again drive commodity prices and as such inflation higher – it will be wise not to implement aggressive interest rate cuts. Especially as interest rates are aimed at controlling future inflation. A total decrease of another 250 basis points in the repo rate during the course of this year is expected.