Inflation's tighter grip bodes ill for rate cut

Johannesburg - Inflation has continued to reach record highs despite a fall in fuel prices last month. Statistics SA reported on Tuesday that CPIX (consumer price index minus mortgage costs) inflation was 13.6 percent over the 12 months to August, compared with 13 percent in July. The index rose 0.9 percent in the month.

The previous year-on-year high was recorded in November 2002, when CPIX touched 11.3 percent.

Coupled with the recent gyrations in commodity prices, the higher inflation outlook will make it difficult for the Reserve Bank's monetary policy committee (MPC) to make a call on interest rates when it meets next month.

CPIX, the Reserve Bank's benchmark measure of inflation, has been above the 3 percent to 6 percent target range since April last year, despite contractionary monetary policy.

The continuing rise last month came after a fall in the price of petrol at the pump in Gauteng from R10.70 a litre in July to R10.40, as the benefits were outweighed by massive increases in electricity prices.

The fuel and power component of the index rose 28.2 percent year on year and 4.2 percent in the month. Fuel and power make up 4.28 percent of the consumer basket. Electricity made up 3.55 percent of the component, said Stats SA.

The lower fuel price was reflected in a 1.9 percent month-on-month fall in vehicle running costs, after massive rises in earlier months. Over 12 months, vehicle running costs rose more than 35 percent.

A major factor in the inflation surge, globally and locally, has been fuel prices, under pressure from steadily rising oil prices.

At last month's MPC meeting, Reserve Bank governor Tito Mboweni said CPIX inflation was "expected to peak at an average rate of around 13 percent in the third quarter of 2008". He predicted it would fall below the upper end of the target range in the second quarter of 2010.


A reweighting of the consumer price basket from January will contribute to the decline, as high-inflation items such as food will represent a smaller part of the total.

Standard Bank predicted inflation "will undoubtedly be slashed by 2 to 3 percentage points between December and January".

Jean Francois Mercier, a contributing economist at Citi, recalculated CPIX using the weights that will apply from next year. He said that on that basis, CPIX inflation rose from 10.6 percent in July to 11 percent in August. Making other technical adjustments in line with the changes to be introduced, he found the gap between his figure and the official figure for August was 3.6 percentage points.

However, Mboweni told parliament on Tuesday that inflation was likely to remain "higher than expected" after the reweighting.

Whatever the impact of the technical changes, commodity prices and the strength of the rand will continue to determine the course of inflation.

The recent price volatility in oil and other commodities has been driven by two perceptions.

One is that the shortage of credit will dramatically curtail economic growth; the other is that rescue packages organised by the US government will expand its deficit, adding inflationary pressure and making commodities a relatively safe haven.

The rand came under huge pressure on Tuesday after news that finance minister Trevor Manuel had resigned