Despite the consumer price index excluding mortgage rate changes (CPIX) for metro and other areas hitting a sky-high 10.9 percent year-on-year in May from 10.4 percent year-on-year in April, leading economist from Investment Solutions, Chris Hart, feels the worst may be yet to come.

"This has gone on for far longer and higher than expectations and it appears that we may still be some way off the peak, with more bad news to come," said Hart.

He feels that South Africa may now be looking at a peak of 13 percent in CPIX and even this "assuming things don't go too far south from here".

He foresees another 50-basis-point increase in interest rates in August and then possibly another of 50 in October.

He says with inflation growing faster than interest rates, there could be concerns around the bond market, with yields likely coming under further pressure.

Added to this there could be "quite some pressure" going forward on stock market earnings due to the dual impact of higher rates and a slower economy.

"There will be a rough period for the investment cycle," says Hart.

Hart says there are some additional problems on the horizon apart from further large fuel rises, electricity tariff hikes and general administrative increases.

The first he highlights is the rand.

"My fear is another bout of rand weakness filtering through," he said.

Then Hart also makes the point that political risk is on the rise, especially if Zimbabwe "collapses", a risk which he sees as high.

"Another million people coming into the country"

"The problem is another million people coming into the country and then we may well look at a social as well as an economic problem," says Hart.

"The problems locally have escalated," concludes Hart.

According to data on Wednesday CPIX was up 1.1 percent month-on-month after it increased 1.6 percent m/m in April.

This is the fourteenth month running that CPIX [now at 10.9 percent year-on-year] has been above the six percent upper target limit.

Of concern is broader inflationary pressure, which excludes volatile foods, municipal rates and monetary policy changes. It was up 11.0 percent year-on-year in May from 10.2 percent year-on-year in April and a clear sign of the expansive nature of the problem.

The annual increase of 10.9 percent in the CPIX for the historical metropolitan and other urban areas was mainly due to relatively large annual contributions in the price indices for food (+4.7 percentage points) and transport (2.3 percentage points), the usual suspects.

But weighing large going forward will be a possible one percentage point addition due to the 27.5 percent electricity increases which come into play in July.

Added to this is the fact that a new weighting structure to CPIX is due to take effect from the July data [due in August], with details set to be released on Tuesday 1 July.

It is likely that market watchers will be keenly awaiting the details of these re-weightings and then working out forecast scenarios around this. Hart's expectation of 13 percent (or worse) could well turn out to be on the money.

A return to the target by the third quarter of 2010 now looks like it is under severe threat and the pain may last a little longer as isolated increases filter into broader prices.

While South Africa is not alone in these challenges, the added political and power risks are things we could really do without in this environment.

I-Net Bridge