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Power hikes kick in

By unknown | Aug 28, 2008 | COMMENTS [ 0 ]

Robert Laing

Robert Laing

Eskom's annual tariff increase caused a July inflation shocker of 13percent, and worse is to come since most households have not seen the full electricity hike on their bills yet.

Cape Town is the only major city to hit residents with the full 36percent electricity hike in July, but that was enough to send the "fuel and power" item in the inflation basket up 23percent monthon-month.

This translated into a full percentage point acceleration from June's 11,6percent in the consumer price index excluding mortgages (CPIX) in urban areas, which the central bank uses as its yardstick for interest rate decisions.

At 13percent, CPIX has overtaken the Reserve Bank's repo rate, which its Monetary Policy Committee voted to hold steady at 12percent on August 14.

The negative real interest rate that the central bank is now lending money to commercial banks is expected to worsen in the coming months. However, the Monetary Policy Committee is set to hold interest rates level when it votes on October 9 - thanks to an improved longer-term inflation outlook.

August's inflation is likely to be higher than July's because the latest data only reflects Johannesburg and most other cities hiking electricity by the originally agreed on 12percent. Johannesburg residents will see a 21percent hike in this month's electricity bill.

The second biggest jump in the inflation basket was vehicle running costs, reflecting July's petrol price increase of 68 cents a litre.

This month's 30 cents a litre drop in petrol prices, along with the up to R1 drop expected when government announces September's fuel prices tomorrow, raise the hope that inflation has peaked.

Razia Khan, an economist at Standard Chartered, said: "The market thinking is clearly that we have seen the peak in South African interest rates - and we would agree. Even with the release of further shock inflation data, it seems improbable that the Reserve Bank will decide to tighten further. But even with the introduction of the new CPI index in the new year, inflation expectations do need to be watched, and they will continue to pose an upside risk to inflation in the months ahead. South Africa is clearly not out of the woods yet."


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