Consumer inflation in the spotlight
Business Day - Nov 21st 2011, 09:49
A Bloomberg consensus of economists expects inflation’s consumer price index to have grown to 5,9% last month compared with the same month last year.
Inflation numbers will be watched closely this week as observers gauge how much they constrain consumer spending in South Africa. Consumer price inflation figures for last month are out on Wednesday.
A Bloomberg consensus of economists expects inflation’s consumer price index (CPI) to have grown to 5,9% last month compared with the same month last year. It was 5,7% year on year in September. A reading of 5,9% would be the index’s highest since January last year.
But Brait economist Colen Garrow believes consumer inflation will have hit the top of the Reserve Bank’s 3%-6% target band, if not broken it, last month. He says this is partly due to the effect of high electricity and petrol prices on consumers, but other forces are also affecting peoples’ pockets.
"CPI inflation is expected to break through the upper end of its target range, remaining there for four consecutive quarters.
"Blame for this happening can’t be pinned solely on the blizzard of administered price increases consumers have had to endure this year, but on the weakness of the rand exchange rate, and the knock-on impact imported inflationary pressures will have on a wide range of goods and services."
Citigroup economist Jean-Francois Mercier expects petrol inflation to have increased further, as pump prices, for 95 unleaded in Gauteng, rose 36c/l to R10,54/l, compared with an increase of only 5c/l in October last year.
Food price inflation probably also rose, moving above 9% year on year in response to increases in grain and meat prices at the producer level, and unfavourable base effects in the fruit and vegetable component. Mr Mercier says there will also be a slight uptick in core inflation, which excludes food, petrol and energy, despite a less favourable currency environment.
The effect of a broken inflation target on the Bank cannot be underestimated, according to Mr Garrow. "This puts an inflation-targeting central bank in somewhat of a quandary. Protecting the inflation target is one thing, but doing so when gross domestic product growth is suboptimal, threatening to edge the economy towards recession, is a challenge. The economy is already in a stagflationary predicament, but if the Bank were to protect the inflation target, the price paid could be a loss of credibility," he says.
High inflation combined with a slow growing or stagnant economy is called stagflation. High unemployment is also common during stagflation.
Moreover, the euro zone’s sovereign debt crisis is continuing, and will have a direct effect on South Africa. A recession in Europe, South Africa’s main trading partner, will result in an economic slowdown in South Africa.
Mr Garrow believes the threat of a slowdown is stopping the Bank from changing the interest rate at which banks lend to one another. "My feeling is that when threatened with a recession, further cuts in rates can’t be dismissed."
Meanwhile, the leading indicator for September is due today. This is the Reserve Bank’s gauge of the health of the economy. The indicator points to economic trends six to 12 months in advance.
It will be interesting, given the economy’s fragile state. Investec economist Annabel Bishop says there is a 40% chance of a recession occurring in South Africa next year.
Producer price inflation data for last month is out on Thursday.
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