New drivers keeps inflation high

The Numbers

CPI January 2009: 8.1% (year-on-year)

CPI January 2009: 0.4 % (month-on-month)

Introduction

The long anticipated new CPI numbers released by Statistics SA on Tuesday disappointed. The increase in CPI at 8.1% was higher than the 7.3% expected by the market. The monthly increase was 0.4%. Four items that are responsible for 50.34% of the new basket will be the drivers of the CPI in future. Analysis shows that changes in prices of these items might sustain the CPI at higher levels than market expectations.

Analysis

Four items, namely food and non alcoholic beverages (15.68%), total rent (15.7%), vehicles (11.25%) and insurance (7.71%), have a combined weight of 50.34%in the CPI. Any changes in these prices will have a comparable larger impact on the CPI and should thus be monitored carefully.

In January, these items increased by 8.2%, indicating that the rest of the basket increased by 8%.

Table 1: Increases in four items outpace increases in the rest of the CPI basket

Food prices remain a fly in the ointment. It increased by 16.1%, driven by both processed and unprocessed foods. Prices of processed foods increased by 19.6% compared to a year ago and that of unprocessed foods by 13%. The stubbornly high rate at which these prices increase despite decreases in some drivers of these prices necessitates an investigation by the Competition Commission into the whole food price chain and structure.

Actual rentals increased by 8%, driven by rentals of flats which increased by 9.3%. Owners’ equivalent rent (OER) increased by an average of 6.7% compared to a year ago. Again, OER of flats was the driver with an inflation rate of 9.1%. Combined, total rentals increased by 7.1%.

Prices of new and used vehicles were 1.1% higher than a year ago. However, the motor industry already indicated increases of up to 20% in prices of vehicles. With its large weighting, this item needs careful monitoring as price increases will be phased in.

The average increase in insurance premiums was 6.4%. With medical aid premiums (about 50% of the total weight in insurance) on average increasing more than 6%, it will maintain upward pressure on this item.

The total increase in healthcare as a group (medical products, doctors, dentists, hospital services and medical aid premiums) was 9.3%. The main drivers were the respective increases of 11.6% and 9.9% in hospital services and medical aid premiums.

The total increase in the education category (primary, secondary, tertiary and boarding fees) was 7%. This increase was driven by a 7.1% increase in primary and secondary school fees.

Other items reflecting hefty increases (apart from electricity tariffs which were 30% higher) include financial services (up 17.1%), housing maintenance and repair (up 16.3%) hotels (up 13.9%), restaurants (up 12.8%), personal care (up 12.2%) and household appliances tableware and equipment (up 10.8%).

Conclusion

Though CPI might increase at a slower pace as the year progresses, sticky food prices might keep the increase higher than market expectations. However, given the weakening world economy, interest rates might still be cut by another 200 - 250 basis points this year. An emergency meeting by the MPC does not seem necessary. Should this however happen, it will indicate that the MPC faulted by not reducing interest rates by the 2% proposed by mr. Tito Mboweni, president of the Reserve Bank earlier this month.