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Inflation in danger zone: Economists
Inflation in danger zone: Economists

Inflation in danger zone: Economists


Business Live - Nov 22nd 2011, 08:22

The consumer price index - the SA Reserve Bank's main inflation targeting measure - is sitting at the top of its three to six percent target range and will breach it this year, according to a survey of leading economists by I-Net Bridge.  

Forecasts among the ten economists ranged from 5.8% to 6.2%, and the consensus was that it reached 5.9% year on year (y/y) in October from 5.7% y/y in September.

According to Zandile Makhoba, economic analyst at Econometrix, CPI was likely to breach the 6% mark before the end of the year.

"CPI inflation increased to 5.7% in September from 5.3% in August. Rising inflationary pressures and the steeper increases in consumer prices as we approach the end of the year are likely to result in the CPI inflation rate breaching the 6.0% mark before the end of the year," Makhoba said.

Similarly, Standard Bank economists Thabi Leoka and Shireen Darmalingam said CPI was closer to breaching the 6% limit.
"Consumers will continue to experience increasing erosion of their purchasing power, as higher fuel costs are likely to keep year-on-year increases high.

"When reaching their interest rate decision, the MPC considered how inflation responded to exchange rate movements - inflation expectations appear to be anchored around the upper level of the target range. However, the reserve bank expects medium-term inflation to exceed the target range, albeit temporarily. We expect inflation to rise to 5.9% y/y in October," Leoka and Darmalingam commented.

Meanwhile, Brait economist Colen Garrow said that CPI inflation was 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 - this puts an inflation-targeting central bank in somewhat of a quandary," Garrow said.

He added that protecting the inflation target was one thing, but doing so when GDP growth was suboptimal, threatening to edge the economy towards recession, was a challenge.

"The economy is already in a stagflationary predicament, but if the SARB were to protect the inflation target, the price paid could be a loss of credibility," he said, noting that a point worth remembering was that the longer the crisis in the eurozone continued, the more could be subtracted from SA GDP, increasing the chances of a recession locally.

"Not priced into the interest rate market currently, is the view of the effect this would have on the policy rate. My feeling is that when threatened with a recession, further cuts in rates can't be dismissed," he said.

Annual CPI registered at 4.3% in 2010 from 7.1% in 2009 and 11.5% in 2008. It was at 7.1% in 2007. The annual average for CPI was 4.7% in 2006 from 3.4% in 2005, compared with only 1.4% in 2004, which was the lowest annual average since 1958.

The October CPI data will be released by Statistics SA at 10:00 on Wednesday, November 23. 

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