March inflation 'horrific'

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boramk

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SA's CPIX rate breached double digits for the first time since 2003, with a shock rise to 10.1% in March from 9.4% in February, raising fears that the Reserve Bank will hike interest rates again in June.

The CPIX rate is consumer inflation excluding mortgage interest rates, and is the rate that the South African Reserve Bank (SARB) watches for monetary policy purposes. SARB has hiked interest rates by 4.5 percentage points, taking the prime overdraft rate to 15%, since its rate hiking campaign started in June 2006. This is the twelfth month running that the CPIX rate is outside of the target range.

Food and fuel were the main reasons for the year-on-year rise in the CPIX, although other factors such as housing, medical care, power, household operations, education, personal care, cigarettes and clothing and footwear also played a role.

Peak not reached?

Nedbank economist Dennis Dykes said that the peak of the CPIX rate might not yet have been reached, depending on what happened to electricity price increases later this year. Eskom has asked for a 60% tariff increase to replace the 14.2% increase regulators granted it last year. Dykes expected Reserve Bank Governor Tito Mboweni to raise the repo rate by a further 50 basis points at the bank's next meeting in June.

Standard Chartered economist Razia Khan said it was especially troubling that the inflation rate was in double digits. "We thought those days were long gone. These are shock numbers that will affect expectations negatively," she said.

She predicted that the Reserve Bank would act to raise the repo rate if further electricity price increases came through. But even if the Eskom price increases didn't come through, Khan thought it would be a difficult call for the Reserve Bank.

Food and fuel

The trouble was that most of the pressure for inflation was coming from food and fuel, and not domestic demand. "Do you really want to kill off demand, when it looks as if it's already dying?" she asked.

ETM economist George Glynos said the number was "horrific" and there was more pressure to come, as he believed that electricity tariffs would be hiked substantially. If Eskom's full 60% demand was granted, it would drive the CPIX rate to a peak of about 11.4% in about September. "This seals the case for at least one more interest rate hike in June. There could be another one in August as well," he said.
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My view point on this is as follows:

1. We are going to have another interest rate increase in June
2. This is going to decrease disposable income even further and even less luxury goods are going to be purchased
3. The people who already stopped purchasing luxury goods are going to have to start purchasing basic goods on credit thus creating a debt spiral

Interest rates are not going to impact on inflation any further as people will still need to buy food and get to work every month. The focus now needs to be changed from punishing the consumer to incentivising producers in order to lower costs.

My family are farmers and even though this is predominantly cattle and forrestry they do plant some crops. Last year this time it cost them to pay R4500 to plant a hectare of corn this year it costs them R9000 per hectare. This is purely due to the increase in fuel prices and increases in the price of other inputs like fertiliser etc. They don't have an increase in demand for their production, they are in actual fact selling less because they have to push up selling prices to cover the increases in input cost and feeding the balance to their cattle which then pushes up the price of meat.
 
I have serious issues with Tito raising the interest rate so much.
I keep hearing economists saying it's all the Reserve Bank can do to curb inflation but I call bull****.
It's meant to curb consumer spending and the Petrol prices (and their knock-on effect) are already doing an awesome job of that.

Surely there is some inventive changes that can be made rather then just flogging the man in the street for everything he's worth.
 
There are internal and external factors that impact inflation. When your population makes money, or credit si cheap, people spend less. More people chasing after fewer goods causes the price of stuff to rise. this kind of action on inflation CAN and probably should be controlled by the Reserve Bank. However, where inflation is being powered by external influences, there is little that the Reserve Bank can do.

In my opinion, its a sign of times to come. Food is more scarce, and oil is more expensive. The NCA put the breaks on rampant credit... the Reserve Bank has increased interest rates over and over again and still inflation gets worse. IMO the inflation we are seeing at the moment is the result fo external pressures. That portion of the market forces that were internal have long been curbed by the interest rate hike. Most consumers have curbed their spending and if Tito continues to put interest rates up, then there is going to be a problem. Other countries are also suffering from high inflation, but stil they ahve chosen to lower interest rates. there are tough times ahead for everyone and right now we shoudl all be saving and bracing for that... however, the Reserve Bank is preventing people from accumulating reserves... food is only going to get more and more expensive... The price of Pork, a staple in China, went up 30% there and staple vegetables went up 20%.. there are many countries on teh verge of serious food shortages.. the famines are coming!! Watch this space
 
When the Goverment need to issue a few tens of billions in bonds again, interest rates will come down again.
 
alf101 said:
When the Goverment need to issue a few tens of billions in bonds again, interest rates will come down again.
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At issuance until it is fully subscribed. Then it will revert to "normal" again! Its such a farce!
 
If the interest rate goes up again then I'm really going to start k@king. How the hell is anyone supposed to afford a house these days. The only thing we can afford is vaseline for all the shafting we get!
 
gregmcc said:
If the interest rate goes up again then I'm really going to start k@king. How the hell is anyone supposed to afford a house these days. The only thing we can afford is vaseline for all the shafting we get!
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Will probably go up by another 1% by the end of the year.
 
I wonder if Tito is using interest rate increases to strengthen the Rand. If so, it might be the intention to cushion the shock of price rises in certain food items and oil that are priced in US dollars.
 
gregmcc said:
If the interest rate goes up again then I'm really going to start k@king. How the hell is anyone supposed to afford a house these days. The only thing we can afford is vaseline for all the shafting we get!
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Oh, but now that we hardly ever have electricity you will be saving money! Oh wait! My bad, Eskom is making us pay MORE for almost non existant service so that THEY are the only ones that dont lose out from THEIR own fkup.. :rolleyes:
 
alf101 said:
Will probably go up by another 1% by the end of the year.
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Well if CPIX cant be curbed very soon then Tito has all the arsenal he needs for a basis point increase at the next review. I shudder to think where it will end up by the end of the year though if this is the case as anyone with half a brain knows that this will have a minimal impact considering the current state of affairs.

We need to review our inflation based interest rate system as clearly in our current state it is not working correctly. We need other quantitative factors to play a more prominent role as this really is hurting the man on the street.

There is no way at this rate that we will see a reduction in interest rates by early 2009. Something must be done urgently.
 
Ozymandias said:
I wonder if Tito is using interest rate increases to strengthen the Rand.
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How does this work?

Ozymandias said:
If so, it might be the intention to cushion the shock of price rises in certain food items and oil that are priced in US dollars.
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We are already experiencing price rises - hence increased CPIX, which in turn drives interest rate hikes.
 
Syndyre said:
Well it makes SA a more attractive carry trade destination if nothing else. Still probably not the best way to strengthen the currency though.
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But it can only delay any minimal affect as raising interest rates will not get it to a sustainable level, and therefore the affect of global price increases will merely be delayed, not avoided. It would be a ridiculous tactic IMHO as either way the general public is screwed (except for the major voting base if this is true though).

There is no doubt however that we are already experiencing the increase in global price increases. CPIX is proof of this.

Thn take into account current account deficit, GDP issues, electricity crisis creating major knock on affects, reduced investor confidence, oil price increases inducing major inflationary pressures etc etc and Tito sould start taking into account exactly what he is doing to the general public by continuosly raising the interest rates. It should be considered evidence that the current system isnt working, as if NCA wasnt proof enough:rolleyes:
 
DJStealth said:
How does this work?
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Higher interest rates makes a currency more attractive on the international currency exchanges.
DJStealth said:
We are already experiencing price rises - hence increased CPIX, which in turn drives interest rate hikes.
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I'm not saying that increased CPIX doesn't factor into interest rate hikes. However, a strong Rand makes commodity imports such as oil, which is priced in US dollars, cheaper. The high oil price is a major driver of inflation.
 
Ozymandias said:
Higher interest rates makes a currency more attractive on the international currency exchanges.

I'm not saying that increased CPIX doesn't factor into interest rate hikes. However, a strong Rand makes commodity imports such as oil, which is priced in US dollars, cheaper. The high oil price is a major driver of inflation.
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I am not a qualified economist so I cant give you the calculations but I dont believe the affects of higher interest rates on the FX market will have enough weight to soften a global price hike. Besides, as I said, its not sustainable and is therefore merely a delay tactic, not an avoidance I dont believe.
 
I personally believe that its very shortsghted on govts behalf to underestimate the volatility of the oil market, especially considering the huge inflationary pressures it places us under. If govt factored in a realistic margin for volatility in the oil market when drawing up the annual budget, they wouldnt have to pass these hikes on to the consumer every time and it wouldnt place the rand under such heavy pressure. It might shift inflation targets, but these could be made for with departmental efficiency (think of the money that is siphoned there) and other areas. Instead, we experience knee-jerk reactions that have a huge impact on the general public, and we hardly ever see corrections downward in this regard.
 
DJStealth said:
But it can only delay any minimal affect as raising interest rates will not get it to a sustainable level, and therefore the affect of global price increases will merely be delayed, not avoided. It would be a ridiculous tactic IMHO as either way the general public is screwed (except for the major voting base if this is true though).

There is no doubt however that we are already experiencing the increase in global price increases. CPIX is proof of this.

Thn take into account current account deficit, GDP issues, electricity crisis creating major knock on affects, reduced investor confidence, oil price increases inducing major inflationary pressures etc etc and Tito sould start taking into account exactly what he is doing to the general public by continuosly raising the interest rates. It should be considered evidence that the current system isnt working, as if NCA wasnt proof enough:rolleyes:
Click to expand...

I'm not saying it would be a smart move, I agree with you, just saying that'd be one way the rand might strengthen.
 
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