Prepare for 15% inflation by Christmas, says analyst
May 11, 2008
By Wiseman Khuzwayo
Johannesburg - The inflation rate is likely to peak at 15 percent towards the end of this year, according to London-based Standard Chartered Bank.
Inflation, as measured by the year-on-year rise in the consumer price index excluding bond interest (CPIX), rose to 10.1 percent in March from 9.4 percent in February. This is nearly double the 6 percent upper limit of the Reserve Bank's inflation target.
Riaz Khan, Standard Chartered's head of Africa research, forecasts that it will get much worse for local consumers, with inflation galloping to 15.1 percent in November if planned electricity tariffs are approved next month, before eventually declining to 5 percent by next Christmas.
Khan says annual inflation is already running at levels last seen in 2002, when the economy recovered from the exaggerated weakness of the rand in 2001.
She adds that the current month-on-month point rises in the inflation index exceed anything seen before in the history of published CPIX data, which goes back to 1997.
Khan says there is little point in wondering if the data yet to emerge on the state of the real economy will prevent a further tightening of policy by the Reserve Bank.
The central bank has raised interest rates by 4.5 percentage points since June 2006.
"Pipeline pressures are strong - but it is not just food and fuel driving prices. Even ahead of the planned increase in electricity tariffs … evidence of a second round of inflation effect is emerging," says the forecast.
It notes that "demands for double-digit increases will dominate" in wage talks as workers' spending power has been eroded by rapid inflation.
This would almost certainly require a policy response by the central bank, which could lift rates by a further 1.5 percentage points by August to prevent real interest rates going deeply negative.
Khan says South Africa, one of the top 10 importers of rice, will see a 30 percent increase in domestic rice prices this month.
Even the sale of basic food items at cost by some retailers will not prevent some inflation feeding through from more expensive food imports.
Standard Chartered says bumper harvests predicted for South Africa's 2007/08 crop year may eventually help to moderate imported food pressures.
A maize crop of almost 11 million ton is forecast this year, against consumption of 8 million tons. A big wheat harvest is also anticipated.
Khan notes that domestic fuel costs will rise again as oil price rises have not been fully passed on. Weaker global demand should eventually moderate crude prices, but tight supplies mean near-term price shocks cannot be ruled out.
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