More rate uncreases in the offering?

The Numbers

CPIX November 2007: 7.9% (yoy)

CPIX November 2007: 0.5% (mom)

CPI November 2007: 8.4% (yoy)

CPI November 2007: 0.4% (mom)

Comment

Driven almost solely by food and administered prices, CPIX for November shot up to 7.9% from 7.3% in October. And worse is to come as December’s number will top 8% trending upward to almost 9% in February, says Prof Chris Harmse, chief economist of Dynamic Wealth.

Harmse says Dynamic Wealth’s more negative view on February’s numbers (compared to that of the market) stems from a new methodology of calculating changes in clothing and footwear prices which will be introduced by Stats SA from January 2008. From next year onward Stats SA will not take discounted clothing and footwear prices into account when measuring price changes – currently prices of clothing and footwear are surveyed irrespective of it being sold at discounted prices.

As clothing and footwear deflation is currently subtracting 0.2% from the CPIX (due to its year on year decrease of 7.2% in November) it can be assumed that this inflation reducing phenomena will gradually disappear.

As for November’s numbers, food and administered prices increased by 11.7% (yoy) from 10.7% in October. The rest of the inflation basket (interest rate sensitive inflation) increased marginally to 4.3% from 4.2%.

Interestingly though is rental inflation which is now running at 4.8% compared to 1.5% in June last year when interest rates started to increase. Harmse says many rental contracts link rental increases to interest rate increases. It can thus be assumed that the seven rate increases of 350 basis points (since June last year to October this year) is (along with other factors) contributing to the increase in the CPIX.

As for the future course of interest rates, much will depend on whether the Reserve Bank will be more forward than backward looking. Only December’s above 8% CPIX number will be available and if the MPC is more influenced by this than the forward trend of inflation the repo rate might be increased again on 31 January 2008.