AFTER decelerating at a sluggish pace from its peak in November, consumer inflation has started to slow rapidly in the past few months, as yesterday's figures released by Statistics SA confirm.

The Reserve Bank's targeted inflation measure, CPIX (consumer inflation less mortgages) slowed to an annual 7,7% last month compared to 8,5% in April.

CPIX is now more than four percentage points lower than its peak of 11,3% in November and less than two percentage points above the upper band of the 6% inflation target.

The correction in consumer price inflation figures, which Statistics SA amended last month after spotting an error in the measurement of housing rents, helped to cut inflation by 1,9 percentage points, but base effects are also contributing to the sharp slowdown in consumer inflation numbers.

Last month's CPIX numbers reflect not only the positive benefits of the downward revisions, but also the spinoffs from the rand's rapid appreciation since last year.

The stronger rand and steady world oil prices helped to cut local fuel costs by 38c/l last month, improving inflation numbers. Transport costs helped to cut the monthly growth in CPIX 0,3% last month, with lower consumer inflation figures expected this month as well.

"The transport component provided sufficient moderation in prices to more than offset the minimal increases recorded in the other subcomponents of consumer inflation," said Standard Bank economist Monica Ambrosi.

"And we note that, although the bulk of the downward pressure came from the fuel price cut at the start of the month, vehicle prices also declined in May."

Providing upward pressure on the CPIX numbers last month were higher costs for food and housing. While food inflation was firmly trending downwards, food costs contributed 0,1% to the monthly rise in CPIX inflation.

There were large monthly increases for the prices of vegetables, but as Ambrosi said, these prices were "considerably volatile and therefore fluctuate aggressively month to month".

However, economists were heartened that food inflation was abating from its peak of almost 20% last year to a year-onyear growth of 11,6% in May.

Lower food prices should also give much relief to rural and poor households. Statistics SA released figures for rural inflation yesterday, giving some insight into the contributions of various expenditure categories to overall consumer inflation.

The figures show that rural households spend more of their budgets on basic necessities such as food.

The weighting for food in rural CPI figures, at 43,01%, is more than double the weight in headline CPI (20,99%), which measures inflation in the historical metropolitan areas.

Transport has the secondhighest weighting in rural CPI, at 9,29%, compared to a weight of 14,84% in headline CPI.

Unsurprisingly, housing's contribution to rural CPI is minimal compared to its impact on urban household budgets. Housing has a weight of 4,52% in rural CPI compared to 22,14% in headline CPI.

According to Statistics SA's figures, rural households spend more than urban ones on the following categories: non-alcoholic beverages, alcohol, clothing and footwear, fuel and power, furniture and equipment, household operation and personal care.

In contrast, rural expenditure on luxury goods was lower than in urban areas, in particular in sectors such as: housing, medical care and health expenses, transport, communication, recreation and entertainment, reading matter and education.

It is not clear yet whether the Reserve Bank will decide to incorporate rural CPI figures in its inflation targeting, but it appears unlikely at this stage.

Statistics SA said the rural CPI figures would be published only as a discussion document every month for the time being.

The price information for the rural areas comprises estimations and not actual figures collected from retailers every month, as is done for headline inflation data.

Rather than conduct price surveys in the rural areas, Statistics SA used the 2000 income and expenditure survey to estimate the expenditure weights for the rural areas, applying the weights to prices monitored in small towns.

"For most items purchased by rural households, the nearest town or city is the preferred outlet, while for some other items the nearest local rural outlet is preferred," said Statistics SA.

Looking at the provincial breakdown of rural CPI also points to some stark differences. Limpopo, which is one of the poorest provinces in the country, had the lowest rural CPI, at 6,2% last month, compared to 9,6% inflation in rural KwaZulu-Natal.

Jun 18 2003 07:20:56:000AM Nasreen Seria Business Day 1st Edition