CONSUMER inflation rose at its fastest pace in three years last month, climbing to 5,1% year on year and all but sealing the case for another increase in interest rates in December. Despite falling fuel prices and three rate hikes since June, CPIX (consumer inflation excluding interest costs on mortgages) came in above market expectations of 4,9%.

It was also higher than the 5% annual rate recorded in August. Economists said the increase ensured a rate hike of at least 50 basis points at the next meeting of the Reserve Bank’s monetary policy committee (MPC), which would bring the total this year to 200 basis points.

Month on month, CPIX rose 0,3%, said Statistics SA. The main culprit in the annual increase was food, which contributed two percentage points, followed by transport (0,7 percentage points), housing (0,6), medical care and health expenses (0,6) and education (0,4), among others. These were partially offset by an annual drop of 0,2 percentage points in the index for clothing and footwear, Stats SA said.

The rand rallied against the dollar after the release of the data, trading at about R7,65 from R7,72 just beforehand and gaining further on the release of the medium-term budget policy statement in Parliament. Stats SA said the consumer price index, which includes interest costs on mortgages, increased 5,3% year on year — an improvement of 0,1 percentage points from August’s annual rate.

Economists said the increase in CPIX made it more likely that the Reserve Bank’s 3%-6% target would be missed early next year, especially if the rand continued to exhibit weakness. “The rand is expected to remain under pressure in coming months, largely as a result of the large current account deficit. Falling commodity prices and negative sentiment towards emerging market currencies could also continue to weigh on the rand,” said NKC economist Noelani King Conradie.

Comments by Bank governor Tito Mboweni about the risks posed by the current account deficit sent the rand into a tailspin early this week, highlighting its vulnerability. Brait economist Colen Garrow said the “persistence with which inflation is trending higher has raised expectations that the MPC may extend restrictive monetary conditions into the first quarter of next year”.

Razia Khan, Africa economist at Standard Chartered Bank in London, said that despite fuel-price cuts and a moderation in month-on-month inflation, it was too early for the Bank to signal an all-clear on inflation. “The recent volatility in the rand and expectations of more to come will be taken into account, given the ongoing strength in domestic demand,” Khan said. She predicted 150 basis points more in policy tightening — 50 each in December, February and April.

Efficient Group economist Fanie Joubert said the challenge facing the Bank was to determine the combined effect of a weaker rand, which would worsen the inflation outlook, and lower international oil prices, which would improve it. JPMorgan economist Marisa Fassler said the higher-than expected-rate of increase in CPIX made it “more likely that CPIX will temporarily breach the upper 6% inflation target range early next year, particularly since food inflation appears to be still on an upward trend and the impact of the weaker rand yet to be seen in the numbers”.

“Our revised forecasts see CPIX inflation peaking at 6,1% in March next year (previously 5,8%) before easing back towards 5% in the latter part of the year. The latest numbers reinforce the case for the Bank to hike interest rates to 9% in December, before going on hold to assess the impact of higher rates on the economy,” she said. With Reuters.