Crucial inflation figures are due this week from Statistics SA. Economists believe that inflation broke through the ceiling of the Reserve Bank’s 3 to 6 percent target range last month, after a series of downside surprises.
Standard Bank predicted last week that July data from StatsSA, due on Wednesday, would show the consumer price index (CPI) rose 6.2 percent year-on-year, while Absa Capital put the figure at 6.5 percent. Expectations of this acceleration were based largely on an 84 cents a litre leap in the price of petrol at the pump and a hike in electricity tariffs. Standard Bank economist Thabi Leoka noted petrol prices account for 5.7 percent of the CPI basket.
Leoka also cited “base effects from food inflation”. In other words moderate food inflation in July last year would provide a low base for the measurement.
At the Reserve Bank monetary policy committee (MPC) meeting last month, the bank’s third quarter inflation forecast was revised up to 6.3 percent, from a previous estimate of 6.1 percent. “The deterioration is mainly due to continued currency weakness and higher than expected petrol price increases,” Governor Gill Marcus said.
The rand depreciated sharply from R8.9 to the dollar early in May to trade at around R10 for the past two-and-a-half months. The price of Brent crude oil rose from around $100 a barrel late in June to about $108 a month later, compounding the impact of currency weakness.
Absa Capital economist Peter Worthington suggested that data on the gross domestic product (GDP) would also show a sudden surge. He estimated that, after “miserly” growth of 0.9 percent annualised in the first quarter, GDP had risen 3.5 percent in the quarter that ended in June.
Worthington said the poor first quarter performance was “largely due to the manufacturing sector, which was affected by a fire at a big steel mill and the refurbishment of the main petrochemical refineries”.
He said a recent release on manufacturing output had signalled a second quarter recovery – 13 percent annualised. And he noted the sector had contributed 17 percent of GDP.
Another sign of a sectoral improvement, he said, was the purchasing managers index (PMI) – the Kagiso PMI has been above the neutral 50 level for four months in a row.
Worthington warned that the market could misunderstand the significance of the two sets of data. “A strong GDP number would be not much more than ‘bounce back’ from a weak quarter one.
“As for CPI, the headline rate is materially boosted by base effects, which will begin to reverse noticeably after CPI inflation hits a sharp 6.7 percent peak in August.”
He noted core inflation has been “subdued with likely limited pass-through from the weak exchange due to the weak demand environment”.
Core inflation strips out items that are routinely affected by seasonal or other temporary factors.
Fuel inflation could start to subside next month. If the rand remains at present levels and the price of crude oil is contained, motorists could get a little relief, after a 32 cents a litre increase this month.