Analysis of September's Consumer Price Index
26 October 05   

MAIN CPI INFLATION MEASURES COME OUT AT 0.2% BELOW CONSENSUS
The September CPI numbers encouragingly came out significantly below consensus expectations, by around 0.2%. Superficially, one of the key reasons for expecting both CPI and CPIX inflation to rise significantly might have been the fact that the price of petrol rose by 29cl at the beginning of September. However, the fact that the petrol price had risen by an almost equally large 23cl in September 2004 meant that the y-o-y petrol inflation rate remained more or less unchanged in September compared with August, at just over 30%. Accordingly, petrol had little direct impact in influencing the September CPI numbers.

However, in the case of headline CPI inflation, one had expected a significant upward push on account of a substantial increase in the CPI for housing. This increase arose from the fact that the September 2004 headline CPI had been depressed by a 0.5% cut in the home loan interest rate in mid-August 2004, but no such rate cut was forthcoming in August 2005. In the event, the increase in headline CPI inflation, from 3.9% in August, to 4.4% in September, was in line with our forecast, but was in fact below the consensus forecast of 4.6%. All the same, even the 4.4% headline CPI inflation rate was the highest such figure in more than two years.

The bigger surprise was the reduction in the CPIX inflation rate, to 4.7% in September, from 4.8% in August, when an increase to 5.0% had been expected. Both in the case of CPI and CPIX, food contributed towards higher inflation as expected in the light of the rise in agricultural futures prices of staple foods in earlier months. In the event, the rise in the y-o-y food inflation rate, from 2.6% in August, to 3.4% in September, the highest level for food inflation in two years, was generally anticipated.

"UNDERLYING" CPI DECLINES BY -0.2% M-O-M
The surprisingly low outcomes for inflation were therefore encouragingly attributable to factors other than food, housing and petrol. In this regard, the "underlying" CPI (i.e. excluding food, housing and petrol) fell by -0.2% m-o-m in September when an increase of 0.2% m-o-m had been anticipated. This is extremely encouraging bearing in mind that Reserve Bank Governor Tito Mboweni has been warning of second-round inflationary effects arising out of the steep increase in petrol prices over the past year. A small part of the unexpected decline in the general price level can be attributed to the essentially artificial revision of changes in domestic workers costs. The latter are revised every six months and in the case of September the change in domestic workers costs emerged at -0.3% m-o-m, compared with +1.3% m-o-m in each of the previous six months and +0.7% m-o-m in each of the preceding six months. If a decline of -0.3% m-o-m is repeated for domestic workers costs in each of the next six months, cumulatively this will result in a reduction in the domestic workers inflation rate of over 6%.

Bearing in mind that domestic workers costs have a weighting of 3.59% within the CPIX, this alone will result in the CPIX inflation rate in six months time being 0.2% lower than might otherwise have been. Bearing in mind that the Reserve Bank's and our own projections are for CPIX inflation to come out not that far below the 6% at the end of the inflation target in the first half of next year, a -0.2% reduction in CPIX inflation other things equal, albeit artificial, will undoubtedly contributed towards enhancing chances of this measure of inflation remaining within target. Encouragingly, outside of this artificial downward impetus on CPI, there were several other welcome and unexpected declines in consumer prices. These included furniture (-0.7% m-o-m), appliances (-0.6% m-o-m), vehicles (-0.3% m-o-m), communications (-2.2% m-o-m) and fuel and power (-2.2% m-o-m). Particularly relevant were the declines in the costs of communications and fuel and power (including electricity). These costs tend to be largely regulated by government and parastatal organisations and it is therefore encouraging to note that lower increases in such administered price increases contributed meaningfully towards reducing underlying inflation. The fact that so many other prices also fell in absolute terms implies that second-round pass through effects from higher fuel prices, were largely absent.

FEAR OF RISE IN INTEREST RATES IN DECEMBER OVERDONE
One has been surprised in recent weeks by the manner in which markets appear to have been spooked by comments by Reserve Bank Governor Tito Mboweni warning against the possibility of imminent interest-rate hikes to ward off second-round inflationary effects arising out of higher fuel prices. These comments have been interpreted by many in the market as implying that interest rates will almost certainly be raised at the December Monetary Policy Committee (MPC) meeting ahead of Christmas. We have remained sceptical of this assessment for the simple reason that the Governor has been known to be fairly unpredictable in his decisions, often leading analysts to believe he will move one-way, only for him to move subsequently the other way. In the light of the unexpectedly low outcomes for September CPIX inflation, the Governor might find it more difficult psychologically to justify raising interest rates just yet. Furthermore, there is little reason to believe that the October CPIX inflation rate, which will be the latest figure available when the MPC meets, will be any worse than the September number. In addition, there is every likelihood that the petrol price will be reduced by at least 25cl next week, adding to short-term disinflationary influences. Whilst some increase in interest rates in the first half of next year is still in the offing, especially if oil prices rebound upwards and the Rand depreciates further, these latest figures are likely to deflate somewhat most recent expectations amongst many that interest rates will be increased already in December.

 

| Macro | Financial | Growth | Retail | Motor | Printing | Back |

   Back to top of page
e c o n o m e t r i x 15-Nov-05