Consumer inflation down in September

Adenaan Hardien, Chief Economist of Cadiz African Harvest Asset Management writes that consumer inflation fell in September, confirming that the August reading was the peak in the cycle. The latest decline was the first since August 2007. The numbers were lower than expected.

Producer price index for September, as calculated by Stats SA were published this week.  The numbers were much better than expected.  

Producer inflation fell to 16.0% from 19.1% in August.  The Reuters consensus was for a reading of 18.3%.  The index fell by 3.5% in the month compared to an increase of 0.5% in August and a decline of 1.0% in September 2007.  Producer inflation was expected to ease on lower electricity tariffs (due to the switchover from winter to summer tariffs) and lower commodity prices (including oil prices), except that the impact of these were bigger than was anticipated.

Although upside inflation risks - especially the rand - have not disappeared, cyclical drivers will dominate the path of inflation over the next few quarters.  And these will ensure a rapid disinflation trend, helped in January 2009 by the reweighting and rebasing of the CPI.  We expect CPIX inflation to only fall within the target in the second half of 2009.  This would suggest scope for policy rates to start declining from early-2009.

The CPIX - the current inflation target - rose by 0.1% and the CPIXu inflation rate dropped to 13.0%.   The CPI rose by 0.2% and the CPI inflation rate dropped to 13.1%. Inflation is measured as the annual percentage change in the respective consumer price index.  Note that from next year the official inflation target will switch from CPIX to CPI.

Detail on the monthly change
The 0.1% monthly increase in the CPIX compares to a historical monthly increase of 0.5% since 1997 and an increase of 0.7% in September 2007.  September is a low survey month that sees the inclusion of biannually-surveyed domestic worker costs. 

Higher food prices, domestic worker costs and personal care costs put upward pressure on the CPIX in the month.  These were partially offset by a 69c/l cut in petrol prices.  The increase in domestic worker costs was lower than in September 2007, allowing the inflation rate of this component to fall.

Detail on the annual change
Food prices remain the key consumer inflation drivers, followed by transportation costs, fuel and power, and housing costs (see chart below).

Implications
The figures confirm that August was the peak in consumer inflation in the current up-cycle.  Although upside inflation risks - especially the rand - have not disappeared, cyclical drivers will dominate the path of inflation over the next few quarters.  And these will ensure a rapid disinflation trend, helped in January 2009 by the reweighting and rebasing of the CPI.

A key driver over the next few months will be lower petrol prices, with a 25c/l and 27c/l cut in petrol prices in October and another likely cut in November (with an average over-recovery of 40c/l month-to-date).  Food price inflation may already have peaked in August. We expect CPIX inflation to only fall within the target in the second half of 2009.  This would suggest scope for policy rates to start declining from early-2009.