South Africa’s inflation dilemma has intensified further, according to Standard Bank’s Residential Property Gauge released earlier this week.

The continued deterioration in the outlook for inflation suggests to the bank that interest rates will remain at current levels for longer than previously anticipated with a strong likelihood of a rate increase in April.

The market had previously anticipated a peak in the targeted CPI(X) measure of consumer prices in Q1 2008. It was thought that, following this peak, CPI(X) would embark upon a steady downward trend, possibly ending the year (2008) within the
target band. The SARB shared a similar view.

The risks of higher oil prices, which had already increased substantially during the course of 2007; a gradual depreciation in the exchange rate of the rand; and food prices remaining at elevated levels were acknowledged in these forecasts.

However, it seems the sum of all fears has been the actual outcome with regard to the outlook for inflation.

In Q1 2008, the rand depreciated markedly against other currencies, and the price of oil surged and settled at a level above US$100 per barrel compared to the annual average spot price of US$73/b for 2007 as whole. This resulted in a 17c/l increase in the petrol price in February, followed by a 61c/l increase in March. A similar increase is anticipated in April.

The latest inflation figures reflect this deterioration in consumer inflation. The targeted CPI(X) for the month of February grew by 9,4% year-on-year. What is more concerning to Standard is that the core rate of inflation has surged to 8,9% year-on-year, indicating that the inflation profile is not merely being driven by exogenous shocks (oil/petrol, food and the exchange rate) but is in fact becoming more broad based. This has probably caused deterioration in inflation expectations, which will feed into higher wage demands.

Eskom’s requested electricity tariff hike of 53%, which will in all likelihood be implemented in some form in the second half of this year, Standards expects to lead to higher inflation. The more severe inflation outlook places pressure on the SARB to increase the interest rate by another 50 bps at its April meeting.

Returning to the outlook for demand and pricing conditions in South African residential property, Standard says, one can safely assume that lower interest will not be the path to an improvement in market conditions in the short term.