Relief over reweighted inflation may be fleeting

Ethel Hazelhurst

The feel-good factor from lower-than-expected inflation data may not last long.

Statistics SA (Stats SA) said yesterday that the reweighted and rebased consumer price index showed prices increased only 5.4 percent year on year, last month. This was below the 5.7 percent forecast of 19 economists polled by Bloomberg and down from 5.7 percent in December.

Investec chief economist Annabel Bishop said the latest figure owed more to the new calculation method “than any actual significant moderation in price pressures”.

The figure was the first in a new series following the reweighting of the basket of consumer goods that make up the index.

When the reweighting was first announced it led to speculation that the exercise would boost reported inflation. However, this turned out not to be the case, largely because the petrol price fell as its weighting in the basket increased from 3.93 percent to 5.68 percent.

Bishop warned that further petrol price increases could reverse last month’s slide. “The petrol price was cut by 15c a litre in January but a hike of 41c occurred in February due to rand weakness, and a huge hike of 85c is likely in March.”

These moves will be magnified by the higher weighting.

The new basket is based on interviews with about 31 500 households in the 12 months to August 2011. It provides a more accurate picture of current consumer behaviour.

The previous survey of income and expenditure took place in 2005/06.

On that occasion the introduction of a new basket was delayed until January 2009, while Stats SA verified and analysed the data. The delay was controversial because the reweighting showed inflation was lower than was previously thought, and that monetary policy had been tightened unnecessarily as a result of the delay.

Inflation was now likely to rise toward 6 percent: the ceiling of the Reserve Bank’s 3 percent to 6 percent target range, Bishop said.

After last month’s monetary policy committee meeting, Reserve Bank governor Gill Marcus put inflation at an average 5.8 percent this year, with a 6.1 percent peak in the third quarter, a call which she said was not based on the new weightings. Two other items which have put upward pressure on overall inflation are electricity and food.

The weighting of electricity has been raised from 1.87 percent to 4.18 percent.

Eskom has asked for a 16 percent tariff increase but the National Energy Regulator of SA is not expected to agree to a hike of that order.

The weighting of food was little-changed, from 14.27 percent to 14.20 percent. Food inflation has been more subdued in recent months following three months (October, November and December) of consecutive declines in the UN Food and Agriculture Organisation food price index. The index measures the monthly change in international prices of a basket of food commodities.

However, last month it averaged 210, unchanged from the revised December value.

Stanlib chief economist Kevin Lings predicted annual food inflation would drift higher to about 10 percent by July or August.

Bank of America Merrill Lynch said that higher-than-expected inflation in coming months would “undermine any residual hopes for interest rate cuts later this year”. The Reserve Bank has left its repo rate at 5 percent since July.