Worrying Upcreep in Inflation

CPI inflation in April rose above the target band of 3-6%, registering 6.1%. This is not good.   Most commentators feel this won’t prompt an interest rate hike tomorrow, but it doesn’t help, and inflation is generally a horrid thing, particularly in a country like ZA with such sluggish GDP growth…

But what do our experts say? 

John Loos from FNB:

Most obvious, given that the overall CPI inflation rate has risen further and is outside the 3-6% target range, is that the numbers exert potential upward pressure on interest rates. Indeed, we do expect further mild interest rate hiking during the course of 2014, to a level where the Prime rate ends the year at 9.75%. However, our CPI forecast is an average of 6.1% for the entire 2014, implying that we don’t expect it to get much worse from here on. And there are encouraging signs in form of a Rand that has behaved itself fairly well of late. This has resulted in a diminishing year-on-year depreciation in the Trade-Weighted Effective Exchange Rate, from a low of -19% in February 2014 to -12.3% as at May (to date). This should see a diminishing imported inflationary effect from currency weakness in the coming months should the Rand continue its period of relative stability.   The 2nd impact of the elevated CPI inflation is likely to be increased downward pressure in Real Household Disposable Income growth, which has already been slowing gradually in recent years. The cumulative rise in consumer price inflation, which amounts to 0.8 of a percentage point since November 2013, increases the possibility that Real Household Sector Disposable Income growth in real terms has slowed further from its 4th quarter 2013 rate of 2.1% year-on-year, especially given the signs that economic growth slowed once again in the 1st quarter.  A 3rd key impact can be in the area of the Food and Beverages Sector. Given that food is where the sharpest inflation surge has been in recent months, one could expect some consumer belt tightening in this area, resulting in further weakness in real Food and Beverage sales especially in the Restaurant and Catering sector, but also in the area of Food Retail. Finally, the 4th of the key impact points that are worth highlighting is the fact that food price inflation has shown a sharp acceleration, and the fact that this impacts more severely on the poor, given the higher weighting of food expenditure in their overall expenditure basket. Therefore, whereas the “Very Low Expenditure Group” (now termed Expenditure Quintile 1) had a 4.7% consumer price inflation rate at the end of 2013, compared to the Very High Expenditure Group’s (Expenditure Quintile 5) significantly higher 5.6%, by April the Very Low Expenditure Group’s inflation rate had accelerated to 6.5%, now higher than the Very High Expenditure Group’s rate of 6%, and the gap is widening.   While a higher overall inflation rate, and potentially higher interest rates, are a negative for everyone, the 4th potential impact, i.e. the greater impact of food price inflation on the poor, remains a key concern in the current time of elevated” social tensions and their potentially disruptive nature towards the economy.

Nedbank’s Economic unit:

On a monthly basis, inflation rose by 0,5 % mainly as a result of a 1,4 % m-o-m rise in food prices which led to a 0,2 percentage point contribution from the food and non-alcoholic beverages category. We expect inflation to rise further in the short term and to remain above the Reserve Bank’s 6 % upper target range throughout this year and into the first half of 2015 due to a fragile rand and higher food prices.    The inflation outlook remains poor in the short term. The Reserve Bank has made it clear that we are in a rate-hiking cycle, but the extent and speed will be rand and data dependent. We do not expect the Reserve Bank to raise rates at this Thursday’s meeting, given that the rand has strengthened substantially since the bank’s last meeting. However, given the need to balance growth prospects with higher inflation we anticipate that rates will rise by 25 basis points at two of the following four meetings.

Annabel Bishop from Investec:

Demand pressures remain modest in South Africa on low confidence, weak employment, slowing real disposable income growth and high indebtedness. The economy continues to run well below potential, and no further increases in interest rates are warranted this year, particularly as economic growth is at risk of coming out below last year’s 1.9% y/y. However, the SARB has communicated its intention to hike interest rates further, even though the signalled sedate trajectory of global monetary policy normalisation over the next twelve months does not warrant it.  The 50bp hike in interest rates in January will serve to moderate demand further this year, keeping the demand component of CPI inflation (CPI excluding all administered prices and food and beverage prices) subdued.  The marginal uptick in CPI inflation in April should not be misinterpreted to read that demand price pressure is rising worryingly, or even that higher prices at the tills are being absorbed by the consumer, and so will become entrenched. Instead, retailers have been battling under sharply escalating State controlled prices such as water, electricity, property rates and taxes and transport. Labour costs have been rising rapidly too, partly also because of the escalation in administered prices. Consumers will not necessarily absorb the higher prices at the tills. 




For many South Africans, high inflation is terrible news, and it is worrying that this strike-bound, snail-pace red-tape tangled economy also has high inflation.  


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