THE INFLATION RATE - CPIX, which excludes the negative effect of rising interest rates - will rise to above the upper limit of 6% in the second quarter of 2007, the Monetary Policy Committee of the SA Reserve Bank warned in its latest release last week.

It's the first time since August 2003 that the inflation rate, excluding interest, will rise to above 6%. That brings - hopefully, only temporarily - an end to 42 months in which the inflation rate was managed successfully between the target of 3% to 6%. In October this year, the increase in CPIX was only 5% above the level at October 2005.

The ordinary inflation rate - the trad-itional consumer price index (CPI) that measures all price increases that affect the consumer and also the cost of the recent increase in interest rates - will probably rise to above 7% by second quarter 2007. The last time it was above 7% was in May 2003; and the 5,4% of October this year is already starting to warn that the latest increase in SA's interest rate will make the CPI increase faster than the CPIX in future.

You don't have to look very far to find the causes of the current unacceptable rate of increase in consumer prices. It's not a drought or a shortage of food. It's not a sharp devaluation of the rand. It's not an increase in the price of crude oil and therefore petrol.

It's quite simply classic demand-pull inflation that's boosted by an abnormal growth of 27% in consumer credit. It's described in the first paragraph of the first page of the Economics 101 textbook: "If the demand exceeds the supply of a product, the price rises." The rise of 21,2% in the price of meat over the past year is a good example. There was no major drought over the past few years. The demand for especially red meat simply exceeds the supply by so much that the price has risen sharply.

To fight the current inflation danger, the cause - excessive demand - must be addressed. The current growth of 27,4% in credit granted to consumers by the SA banking sector in October 2006 compared with the same period last year must be significantly reduced. And it's not difficult to calculate the correct rate of increase in consumer credit.

Take the desired inflation rate. Let's say it's 5%. Add the expected or desired real economic growth of, say, 4%, and it's clear that credit or money supply must increase by 9%/year. Not 27%, as is the current case.

To force the increase in consumer credit down to 10%/year or less, the SA Reserve Bank will have to raise the interest rate substantially.

The current prime overdraft rate of 12,5% will have to increase to at least 14% by May next year.

The increase in household debt as a percentage of household income of about 52% in 2002 to the current 73% - which is presumably going to increase to 75% by year-end, along with the expected increase in the cost of borrowed money from, say, an average of 10% to the expected 14% - will result in the average consumer having to spend a far greater portion of his income on interest in future.

That could rise to as much as 10,5% early next year, compared with the very comfortable 5,5% in 2004. That increase of five percentage points will have to be cut from somewhere else - and that won't be so easy.

The table shows a summarised version of the basket of goods on which the average household spends its money. It's drawn up according to the spending patterns of 2000. The price of each item was then set equal to 100.

The current value of 174 for meat, compared with 72,9 for shoes, says that a new pair of shoes is considerably cheaper now than a steak compared to what it was in 2000.

Every household that's affected by the higher debt and the now rising interest rate will have to cut back somewhere to make provision for the extra five percentage points that it may have to pay for interest on debt.

Investors - especially in retail shares - will have to start wondering where the five percentage points will be cut. Non-essentials, such as a new dress or a pair of trousers, or new furniture, may be the first to suffer. It might be a good idea to start learning the art of resoling shoes.