record inflation

Robert Laing

Robert Laing

Inflation hit a record high of 11,6percent in June, making it inevitable that the Reserve Bank will raise its repo rate to 12,5percent when its Monetary Policy Committee next votes on August 14.

This would bring the prime rate on which commercial banks base home, car and credit card loans to 16percent.

A small consolation for households is interest rates will still be one percent lower than when inflation hit its last record of 11,3percent in September 2002. The repo rate then was 13,5percent and prime 17 percent.

June's consumer inflation index excluding mortgages (CPIX) - the Reserve Bank's yardstick for its interest rate decisions - came in slightly higher than the consensus 11,4percent expected by leading economists.

They had counted on consumers seeing the lower food prices at farm gates shown in the past few months' producer price index (PPI). Statistics SA will release June's PPI data today.

According to Stats SA, consumers did see vegetable and fruit prices getting 2,2percent cheaper from May to June, but grain products showed June's biggest month-on-month increase of 4,6percent, taking grain inflation for the year to nearly 35percent.

Danelee van Dyk, an economist at Standard Bank, said: "The real food inflation culprit is prices of processed, rather than unprocessed, foods."

Processed food has risen in price by 21,3percent versus 13,2percent for unprocessed food June year on year.

"The demand for processed foods is directly related to generous income growth - a trend also noted in other countries where living standards are improving rapidly, such as China and India. For instance, in South Africa the consumption per capita of dairy products has grown by 26percent since 2003, outpacing growth in consumption of meat.

"Prices of grain products, breakfast cereals, pasta and biscuits, which have little resemblance to the original commodity, have risen to 33,8percent in June from 18,4percent in January this year," she said.