Inflation comes in higher than expected

Wednesday, February 25, 2009

Pretoria - The Consumer Price Index (CPI), which is the Reserve Bank's new inflation measure, dropped by less than expected to 8.1 percent in January 2009, Statistics South Africa (Stats SA) reported, Wednesday.

CPI decelerated to an annual 8.1 percent in January from the previous month's CPIX (consumer price index excluding interest on mortgage bonds) figure of 10.3 percent, coming in at a higher figure than was expected in the markets.

"The inflation figure is definitely higher than was expected, but this was also due to uncertainty with the reweighting and rebasing of the CPI basket.

"Today's figure as well as the recent Gross Domestic Product figure means an early rate cut is a reality," senior economist at Investment Solutions, Chris Hart, told BuaNews, Wednesday.

Mr Hart said when looking at the GDP figure, one has to appreciate that the external circumstances affecting the world economy at the moment had to be taken into consideration.

January's GDP figure shows, he said, that interest rates alone cannot effectively control inflation, but that South Africa needs to use industrial policy to promote competition and also use fiscal policy to promote savings.

"I expect a 100 basis point cut in the repo rate if an interim [or early Monetary Policy Committee] meeting takes place, and then a 100 basis point cut in April again," Mr Hart predicted.

Stats SA reported that this is the first annual inflation rate published using the new 2008 CPI basket and weights.

"Food and non-alcoholic beverage prices increased by 1.9 percent between December 2008 and January 2009 taking the annual rate to 15.7 percent," Stats SA said.

The monthly increase in the food index was largely driven by monthly increases in vegetables, fruit and meat with increases of 6.9 percent, 4.2 percent and 2.1 percent, respectively.

Stats SA indicated that the transport index declined by 3.1 percent between December 2008 and January 2009, mainly due to an 18.8 percent drop in the price of petrol.

Other categories showing above average annual increases were restaurants and hotels with 13.2 percent, alcoholic beverages and tobacco with 10.2 percent, housing and utilities with 9.2 percent, and recreation and culture with 8.6 percent.

The provinces with the lowest annual inflation rate were Western Cape at 7.7 percent, Northern Cape with 7.7 percent and Gauteng with 7.8 percent.

KwaZulu-Natal, Eastern Cape and Limpopo recorded the highest provincial annual rates of inflation, Stats SA said.

The MPC dropped the repo rate in December 2008 and February 2009 as inflationary pressures eased with the significant drop of oil prices feeding through into much lower domestic fuel prices.

The MPC, whether they call for an early meeting or whether they stick to schedule for a meeting in April, are expected to drop the repo rate again to help stimulate South Africa's economy by giving consumers more spending money.