Inflation levels off, giving bank comfort

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Published Jul 24, 2014

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Johannesburg - Annual consumer inflation remained at 6.6 percent last month and was 0.3 percent over the month, providing some comfort to the Reserve Bank, which has said inflation risks were on the upside.

The rate was marginally lower than market expectations of 6.7 percent, but inflation remains at its highest level in almost five years.

David Faulkner, an economist at HSBC Securities, said that this was the first time this year that consumer inflation had printed below market expectations.

He said: “It is unlikely that there will be a significant reprieve from price pressures in the economy. While we think that June marks the peak in CPI [consumer price index], we expect consumer inflation to remain well above the SARB’s [Reserve Bank’s] 6 percent upper target until the end of the year, averaging 6.4 percent in the second half of the year.”

Faulkner said the Reserve Bank had hiked the repo rate by 25 basis points to 5.75 percent last week as a result of inflation pressures, concerns over a potential wage-price spiral and dislodging of inflation expectations.

He said that HSBC expected another 0.25 percentage point rate hike at the Reserve Bank’s monetary policy committee meeting in September.

The CPI released by Statistics SA yesterday shows food and non-alcoholic beverages prices rose by a modest 0.1 percent between May and June, resulting in an unchanged 8.8 percent annual rate.

The petrol price fell by 22c a litre last month, the second consecutive decrease. However, annual inflation remained high for petrol at 13.3 percent.

Economic consultancy Econometrix said that if one calculated the inflation rate to the second decimal point, one saw that the inflation rate actually declined marginally last month, to 6.08 percent from 6.26 percent in May.

It said: “The significance of this is that it represents the first reversal of a rising trend of inflation that has been in place since November last year.

“Inflation had increased during the first five months of this year on the back of the sharp 18 percent depreciation of the rand over the course of last year.”

Econometrix said for some time now, it had been indicating that three important factors would contribute towards a topping out in inflation quite soon.

First, prices of maize and other agricultural commodities have fallen sharply in recent months. Second, petrol prices have stopped increasing to the same extent as they were doing last year. And third, the rand has stabilised this year, so the pass-through effects of rising import costs will tend to dissipate.

Econometrix said there could be some decline in inflation next month on account of statistical factors related to petrol. Accordingly, the inflation outcome for May and June might turn out to have been the high point in the current inflationary cycle.

“The principal danger lies with the possibility that the National Energy Regulator of SA might grant Eskom a far bigger tariff increase than last year’s 8 percent. Although there have been large demands by unions, these need not be inflationary because business is simply restricting the increase in its wage bill by reducing the size of its workforce.”

Econometrix said although it remained relatively positive about inflation gradually moving back to within the the Reserve Bank’s target range of between 3 percent and 6 percent, the central bank had made it clear with its actions it intended pushing up nominal interest rates modestly over the coming year to bring real interest rates back into positive territory, the so-called “normalisation” of interest rates.

“For this reason, we still believe that there will be another 0.25 percentage point hike in interest rates later this year and a further 0.5 to 1 percentage point rise in interest rates over the course of next year.” - Business Report

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