Inflation 'to breach 6%'  as electricity prices soar

INFLATION could breach the top end of its official target range next year, based on new calculations of price data, ruling out any further cuts in interest rates and complicating the Reserve Bank’s monetary policy decisions.

A revamped consumer price index (CPI) released by Statistics South Africa on Tuesday and due to take effect in January gives considerably more weight to housing costs, mainly because of dramatic increases in electricity prices over the past few years.

Several analysts said on Tuesday that, based on the new weights, consumer inflation would have reached 6% in September.

Eskom’s application to the National Energy Regulator of South Africa for a 16% increase for the next three years was likely to put more upward pressure on consumer inflation than previously assumed using the old measure of the CPI, analysts said.

This is important as the Bank monitors CPI when it makes decisions on interest rates, and its goal is to keep inflation inside an official 3%-6% target range.

Inflation measured by the index rose to 5.5% in September from 5% in August, mainly due to higher food and petrol prices.

The new index gives less weight to vehicle purchases — which have seen minimal price rises — and considerably more to the operating costs for both private and public transport, which have been climbing sharply.

"These changes could undermine inflation and we could see a breach of the inflation target sooner rather than later," Standard Bank economist Thabi Leoka said yesterday. "It creates a dilemma for monetary policy," she said.

The Bank wants to support the flagging economy with low interest rates, and last reduced its repo rate by half a percentage point to 5% in July.

Rising inflation could shift the debate from the chances of another rate cut to the timing of a rate hike, although this would be a long way off, Citigroup economist Leon Myburgh said.

Electricity prices now play a more significant role as their weight in the new CPI has more than doubled to 4%.

This may seem tiny, but if electricity tariffs rise by 16% over each of the coming three years, as Eskom has proposed, the contribution they make to overall inflation are magnified.

"We must assume that the inflation trajectory over the next few months will be higher and, come January, it could easily pierce the upper limit of the target band," Absa Capital economist Ilke van Zyl said.

"There was a risk of this before and now the risks have increased," she added.

In September, the Bank forecast that inflation would remain comfortably inside its target range through to the end of 2014.

The new CPI weights are based mainly on a 2010-11 income and expenditure survey from Statistics South Africa, also released yesterday, which updates spending patterns measured by a similar survey five years beforehand. They also incorporate data from retail sales surveys and the national accounts for gross domestic product, the broadest measure of economic output.

The new calculations show that the effect of services in the CPI now slightly exceeds that of goods. The existing index has it the other way around.

Electricians and plumbers are included in the household maintenance category of the CPI for the first time, while satellite dishes and cameras have been added to the recreation category.

The new index includes 393 items compared with 402 in the current CPI basket. It will be rebased to reflect prices this year, from 2008 previously.

Source: www.bdlive.co.za

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