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Wed, 26 May 2010 - 17:30

Administered Price Pressure

The latest CPI figures were released today by Stats SA, for the period ended 30 April 2010. Headline inflation came in at 4.8%, which is the lowest in around 4 years, and lower than the forecasted 5.0%. The data released by Stats SA contains a wealth of information, not just the headline inflation number that gets widely reported. There are therefore many ways to slice and dice this data depending on what you are looking for.

This month we will take a closer look at the inflation rate of administered prices, and how it has changed when compared to the overall inflation rate. Administered prices are defined on the Stats SA website as, "An administered price is defined as the price of a product which is set consciously by an individual producer or group of producers and/or any price which can be determined or influenced by government, either directly or through a government agency/institution without reference to market forces. Products and services included are assessment rates, sanitary fees, refuse removal, water, electricity, paraffin, petrol, public transport - trains, motor licences, motor registration, telephone fees, postage, cell calls, television licence, school fees, university/technicons/colleges and university boarding fees."

This definition essentially encompasses those prices regulated by government, whether the good/service is provided by government - like refuse removal or water - or by other entities in which the government exercises pricing control to a greater or lesser extent - like petrol or university fees.

Below is a chart comparing the inflation rate for administered prices (both regulated and unregulated goods and services) over 3 years, taken at 6 month intervals, compared to the headline CPI rate. As at the end of April 2010, administered prices accounted for nearly 15% of the total inflation basket.

It is interesting to note that over this period the regulated CPI has been higher than overall inflation in all periods accept for 2009. Much of this can be attributed to the high petrol and energy costs over this period, in particular the petrol price raced up in 2008 as the price of a barrel of oil neared $150 in June 2008. The subsequent crash of the price into the $30 - $40 range is reflected in the 2009 numbers.

While the price of fuel gets a large part of the blame, other items in this basket have been growing at rates higher than the average rate of inflation including items like rates, water, electricity, and motor licensing and registration. The income from these goods and services falls into various government coffers, and is one way for government to increase revenue in tough economic times without having to raise tax rates on more headline items like income or VAT.

In a country that has an element of inflation targeting in monetary policy, government needs to be wary that they don't inadvertently fuel the inflation rate further by consistently increasing prices at a rate that is higher than the maximum targeted inflation rate (6%). They need to delicately balance the conflicting needs of income maximisation and price stability.

With headline inflation approaching the midpoint of its target range there is potentially scope for the MPC to drop rates further at their next meeting. With the committee setting policy on 12 - 18 month forecasts, it is unlikely that they will drop rates again.

Take care,

Mike Browne info@seedinvestments.co.za www.seedinvestments.co.za 021 9144 966

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