Oil starts to threaten inflation numbers

Posted On Thursday, 25 August 2005 02:00 Published by
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HIGH oil prices are to blame yet again for SA’s higher inflation numbers in July, and it seems this is only the beginning of an upward trend.

Ayanda Shezi

Economics Correspondent

HIGH oil prices are to blame yet again for SA’s higher inflation numbers in July, and it seems this is only the beginning of an upward trend.

Inflation is expected to rise in the coming months, peaking just below the upper limit of 6% of the Reserve Bank’s target band in the first quarter of next year.

The effect of high oil prices on the prices of goods and commodities finally hit last month’s inflation numbers, although analysts say the full repercussions are yet to be felt.

The economy is indeed “at the mercy of oil prices”, as Reserve Bank governor Tito Mboweni said at the monetary policy committee’s last meeting earlier this month.

“The higher-than-expected consumer inflation data puts paid to October interest rate cut hopes,” says Efficient Group economist Nico Kelder.

Analysts say that despite the risks posed by oil prices, the inflation outlook remains upbeat, and a rise in interest rates is unlikely this year, but is expected in the first half of next year.

CPIX (consumer inflation less mortgage costs), the Bank’s targeted measure of inflation, remained within the bank’s target of 3%-6% for the 23rd consecutive month in July, but an upward trend is expected in coming months, as oil prices remain at record levels.

CPIX rose 4,2% (3,5%) year on year in July, and 1% in the month. A Reuters poll of economists had forecast a 3,9% year on year rise.

CPIX hit a record low of 3,1% in February, largely on the back of a strong rand and falling fuel prices. But fuel prices rose by 30c/l in July, and a further 27c/l this month.

As a result, transport is expected to again make a large contribution to August’s consumer inflation numbers. Energy prices account for about 5% of the index, and fuel prices have increased nearly 30% since the beginning of the year.

Analysts say the Bank will probably wait to see what the second- and third-round effects of higher oil prices will be on price pressures in the medium term.

“There is no denying that inflation pressures are rising and that second-round effects related to the fuel hikes might be developing,” says Standard Bank economist Monica Ambrosi. “These pressures are likely to render the Bank hawkish for the remainder of the year.”

If retailers increase the prices of goods and services, and workers ask for more money as high fuel prices eat into their disposable incomes, it could mark the end of the cycle of accommodative policy, and the Bank may need to increase interest rates if CPIX is to remain within its target band.

“The future changes in the oil price seem to hold the key to the future movements of SA’s inflation and interest rates,” says Kelder.

July is also a relatively high survey month, with reports on rents; municipal rates and taxes; electricity and water tariffs; and medical costs, and the sharp increase in CPIX is thus unlikely to be repeated in August.

“Prices at the retail level are expected to rise further towards the 5% level,” says NKC economist Hugo Pienaar.

Food prices also surprised on the high side in July, rising 0,9% month on month, after falling 0,5% in June, indicating that they remain volatile.

“As always, the inflation outlook will to a large degree depend on developments in the international oil markets and with the rand exchange rate,” says Pienaar.

Oil prices remain close to recent record highs, with Brent crude trading at $65,27 a barrel yesterday. Since the beginning of the year, Brent crude has risen 37%.

The Atlantic hurricane season, which wreaked havoc with the oil markets last year, is normally at its peak in September and October.

“Expectations are that the season could be particularly severe this year and should any damage be done to US oil and gas facilities in the Gulf of Mexico as a result, oil prices should scale new record highs,” Pienaar says.

The rand has been trading at around R6,50 to the dollar for some time now, but it is 20c weaker in the third quarter than the last quarter.

“We continue to believe that the rand will trade at weaker levels towards the end of the year and although this is not expected to put major upward pressure on inflation, combined with the high oil prices, it remains a risk,” says Pienaar.

High wage increases above 6% are also expected to pose a threat to inflation, analysts say.

“At this stage we do not believe it will be necessary for the Bank to raise interest rates this year, but importantly, we rather believe that the mentioned risk factors will prevent any further rate cuts,” Pienaar says.


Publisher: Business Day
Source: Business Day

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