Now you too can be an ex­pert

Fore­cast 6,3% CPIX for April

Finweek English Edition - - Creating wealth - BY VIC DE KLERK vicd@fin­week.co.za

“OUR IN­FLA­TION RATE for April will be more than 6%, and the Re­serve Bank’s Mone­tary Pol­icy Com­mit­tee (MPC) will have to raise in­ter­est rates by at least 0,5% af­ter its meet­ing on 6/7 June. That will push prime over­draft rates up to 13%/year.”

Yes, it’s not at all dif­fi­cult to pre­dict how the in­fla­tion rate will be­have over the next few months. Just watch the prices of cer­tain house­hold items that are bought ev­ery day, un­der­stand a few ba­sic ta­bles and learn some sim­ple arith­metic that can eas­ily be done on a cal­cu­la­tor.

Con­sumers will know that very lit­tle of last month’s drop in the meat price worked its way through to the butch­ery. This fall is in any case start­ing to look like a sev­en­day won­der now that farm-gate meat prices have again risen sharply over the past few days.

The sec­ond place to look is the stats pages in news­pa­pers and mag­a­zines, where it’s shown that the av­er­age un­der-re­cov­ery on petrol to 12 March was 67,28c/litre. This fig­ure tells us that on the first Wed­nes­day in April the fuel price could eas­ily in­crease by 50c/litre or more, bring­ing us back to R6,50/litre in Gaut­eng.

Meat and petrol to­gether make up 12% of the weight of the in­fla­tion bas­ket.

Af­ter the heat wave of the past four weeks or so and the per­sis­tent drought that re­fuses to ease off – in any case it’s now too late for any rain for this sea­son – the prices of agri­cul­tural prod­ucts, in ad­di­tion to the ex­pen­sive meat, are show­ing an in­ex­orable rise, lead­ing to an un­com­fort­able feel­ing where prices are con­cerned.

The rand has weak­ened by more than 20% against the euro over the past year, and the fact that most of our trade is done in this cur­rency is a sign that pres­sure is in­creas­ing on the prices of nearly all prod­ucts in the con­sumer’s monthly house­hold bas­ket.

Know­ing all this, it’s easy to sound like an econ­o­mist and to pre­dict where the in­fla­tion rate is head­ing. Fo­cus on the CPIX – that’s the in­fla­tion rate with­out the ef­fect of mort­gage bond in­ter­est rates – which is the one the Re­serve Bank wants to keep be­tween 3% and 6%.

The in­fla­tion rate for Jan­uary was 5,3%, and af­ter its Fe­bru­ary meet­ing, the MPC an­nounced boldly that the fig­ure wouldn’t ex­ceed 6% this year. That was be­fore the heat wave. The or­di­nary in­fla­tion rate – some peo­ple use the dread­ful term head­line in­fla­tion – was al­ready 6% in Jan­uary.

The ta­ble is from Stats SA and is very handy for the DIY econ­o­mist. It shows the CPIX in­dex over the past two years, as well as the monthly in­crease on an an­nual ba­sis. In Jan­uary, the in­dex was 145,0, com­pared with 137,7 in Jan­uary last year. That’s an in­crease of 5,3%, and at least just be­low the 6% up­per limit of the in­fla­tion tar­get.

Con­sumers will re­call that things didn’t go too badly in Fe­bru­ary. (The in­fla­tion rate, in­ci­den­tally, is only mea­sured over the first seven days of ev­ery month.) The petrol price fell, though meat was al­ready ex­tremely ex­pen­sive, and the first signs of the heat wave ac­tu­ally brought veg­etable prices down.

Now the econ­o­mist must look at the pos­si­ble in­crease on a monthly ba­sis. Be­tween Jan­uary 2007 (in­dex 145) and De­cem­ber 2006 (in­dex 143,5), prices rose by a whole 1%. When mul­ti­plied by 12 it gives an in­fla­tion rate of 12% for the year. Luck­ily prices don’t in­crease so much ev­ery month, and it looks re­al­is­tic to guess that Fe­bru­ary’s in­crease from Jan­uary will only be about 0,6%. That brings the in­dex for Fe­bru­ary to 145,9, or about 5,7% more than the 138 of Fe­bru­ary last year. Now we’re get­ting close to the up­per tar­get of 6%.

In March we al­ready know that the fuel price has in­creased and that the heat wave and the drought in the north­ern parts of the coun­try have caused a lot of harm. It’s not un­rea­son­able to guess that the prices in the first seven days of March could have risen by as much as 0,7% over Fe­bru­ary’s fig­ures. That pushes the in­dex for March up to 146,9, which is a whole 5,98% up on the 138,6 of March last year. So it’s still not 6%, but only by the skin of your teeth.

It isn’t un­rea­son­able to pre­dict now that in April the prices – of ev­ery­thing from petrol to carrots – will be 0,8%, or even as much as 1%, higher than in March. That pushes the in­dex of our bas­ket of con­sumer goods up to at least 148 in April, and there it is – 6,3% up on the 139,2 of April last year. The fig­ure will be re­leased by Stats SA on 25 May, and the wise men of the MPC meet again on 6 and 7 June. Any guesses what they will do with the in­ter­est rate?

IN­FLA­TION RATE ABOVE 6% NOW IN­EVITABLE

Source: Stats SA

THE CON­SUMER PRICE IN­DEX EXCLUDINGUDING IN­TER­EST RATES

Source: Stats SA

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