Mariam Isa
26 June 2008
Johannesburg — INFLATION rocketed to a 5½-year peak last month, beating forecasts and backing the view that the Reserve Bank will raise interest rates again this year to tame rampant price rises.
Target CPIX inflation rose 10,9% year on year, up from 10,4% in April and its highest since November 2002, driven once again by the soaring costs of food and fuel. Headline consumer prices - a more comprehensive measure of the cost of living - rose 11,7%, up from 11,1% and above market forecasts for an 11,4% rise, official data showed yesterday.
The rand firmed 1,3% to R7,88 to the dollar after the news, which traders said sealed the case for a half-percentage point rise in lending rates at the Bank's August policy meeting.
"Everyone is now back in the swing of expecting more rate hikes," said Citigroup senior dealer Julian Wilson. Higher interest rates boost the rand's "carry trade" yield appeal.
With no sign of a letup in the main inflation culprits, and new electricity price hikes about to take effect, yesterday's official figures suggest CPIX will climb beyond the 12% peak predicted by the Bank earlier this month.
They also showed price pressures had affected most of the goods and services monitored by Statistics SA in a trend set to bolster inflation expectations and higher pay increases.
The figures did "not bode well for the inflation trajectory", said Standard Bank economist Danelee van Dyk. Eskom tariff increases would put CPIX in the "13%-14% playing field" later this year. They would also help keep inflation above its 3%-6% official target range for longer after a breach which had already lasted 14 months.
"At this rate, CPIX inflation is unlikely to return to within the target band in 2010, which makes further monetary policy adjustment definite," she said.
Food prices delivered the worst shock, about 17% higher than those of May last year and accounting for nearly half the overall increase.
That is bad news for poor people, who spend half their money on food. Inflation for the lowest-income earners jumped 18,5%, above a 16,3% rise for the top-income group.
Transport prices were the next big offender, rising 16,7% year on year after a 6,2% fuel price rise during the month.
Fuel prices rose another 5,2% this month. Further hikes are in store for next month after global oil prices scaled new peaks.
Efficient Research economist Doret Els said prices rose more than 6% in 12 of the 17 categories in the consumer price indices, showing inflation pressure "building on a broad front".
Markets have priced in only one other half-percentage point hike in lending rates this year, which will boost prime lending rates set by banks to 16%.
That would take the cumulative rise since June 2006 to 5,5 percentage points. This has begun to curb economic growth, a trend the Bank flagged as a concern. Some economists expect two more rate hikes this year, given the price pressures.
Ashok Bundia, economist at Goldman Sachs, said: "We remain comfortable with our forecast that the (Bank's monetary policy committee) will continue to hike its policy rate by a cumulative percentage point before the year-end."
Most emerging market countries that target inflation have failed to meet their goals this year. A rising number - including Brazil, India and Turkey - have raised rates.
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