On first sight there was some good news this morning. No, I am not talking about the re-branding of Summit TV to a Business Day product. If that can revive a stale and dull TV offering and give it a new drive and dynamism, I will welcome it. No, the important good news I am talking about is the new CPI number. Consumer Price Inflation was at 5.6 percent in May, down from 5.9% in the previous month. So what do our experts make of it all?
George Glynos, Managing Director, ETM Analytics:
In May, consumer price growth fell to 5.6% y/y, after having remained unchanged at 5.9% y/y for the previous three months, with the reading coming in better than market expectations for a marginal decrease to 5.8% y/y. On a monthly basis, prices contracted 0.3% from 0.4% m/m growth in April. CPI has remained buoyed at close to the upper limit of the SARB’s 3-6% target range over recent months, remaining well above a low of 4.9% seen back in July 2012. Whilst a rather sharp decrease in the fuel price in May would have helped keep headline CPI contained, the likelihood of price pressures becoming more robust in the short term remains – as the lagged effect of the weaker ZAR is expected to become increasingly visible. Additionally, analysis of the Food and Agricultural Organisation food price index and wheat futures show both gradually increasing, which suggests that the risks to food inflation in the short term are tilted to the upside. That being said, it was food prices which surprised to the downside this month. What this data also does is highlight the extent to which the inflation transmission mechanism has been dulled by the weak growth backdrop. It reflects a squeeze on margins and may be an overriding negative for equities, especially in the Fast Moving Consumer Goods sector. Why do I care? Despite the softer reading, CPI remains buoyed at the upper level of the SARB’s inflation target, with upside risks to inflation remaining present as the lagged effects of a weaker ZAR are expected to become visible in the months ahead. On the back of this morning’s data, the markets will be happy to price in a reduced risk of a hike, but the ultimate direction will remain determined by direction of ZAR.
Peter Attard Montalto from Nomura:
On CPI, the surprise seems to have been driven by non-durable goods and food, and we should remember this is still too early to see the big pass-through effects of weaker foreign exchange, and we can probably still breach the (6% upper end of the band) target just in August after this number. Hence I think, given political/policy dynamic worries and worries on skew in CPI, even given this number, we can’t really point to increased chances of rate cuts.
Nedbank Economic Unit:
Despite the slowdown in the annual inflation number in May, we still foresee a breach of the 6 % upper inflation target range in the third quarter of this year, with the weak rand exerting most of the upward pressure. The latest inflation numbers do not alter our interest rate view. We believe that rates will remain at current levels for the rest of this year. The MPC will need to strike a balance between high inflation and still poor economic growth outcomes, with the current policy stance likely to remain in place well into 2014.
Dawie Roodt from the Efficient Group:
A nice surprise to see CPI coming lower than expected. However, the effect of the weaker rand is only likely to show its impact in coming months. Expected CPI to accelerate!
We have been given a bit of breathing space with this latest inflation number. But the future is uncertain, and we should not forget that our inflation rate is still higher than those of many major competitor and partner countries. There is no reason to sob, but the smiles should not be too broad, either.
Tweets of the Day:
Neville Lamberti (@nandibev): Brilliant. German protester placard on Obama arrival in Berlin, ‘Yes we scan’.
Gus Silber (@gussilber): I only had small change for a guy selling ID-book covers at a robot. "That’s okay," he said. "Beggars can’t be choosers!"