CPI slide puts pressure on MPC for further monetary easing
JOHANNESBURG – The country's Consumer Price Index (CPI) continued its downward trend in May, falling to 2.1 percent from 3 percent in April, putting more pressure on the SA Reserve Bank (SARB) to continue its monetary easing regime next Thursday.
Data from Statistics SA (Stats SA) yesterday showed that the CPI eased to its lowest reading in 15 years in May, mainly on the back of weakening fuel prices. Stats SA said the CPI was in line with the year-on-year market consensus, and below the central bank’s target range of between 3 and 6 percent.
SARB’s Monetary Policy Committee (MPC) is scheduled to meet from next Tuesday and announce its decision on Thursday. Pressure has mounted for the MPC to cut interest rates further in order to stimulate the country’s stagnant economy amid the Covid-19 slowdown.
Sanisha Packirisamy of Momentum Investments said depreciating inflation boded well for another rates cut.
“In our view, decimated demand and anchored inflation expectations leave room for the SARB to ease interest rates by up to a cumulative 50 basis points in 2020,” Packirisamy said. “Given front-loaded bolder policy decisions taken earlier in the year, we could see the SARB move to increments of 25 basis points.”
The last time the CPI reading was this low was in September 2004, when it touched 1.3 percent. Stats SA said fuel was a major drag on CPI, as the fuel index slumped 12.2 percent from April.
Transport – which includes fuel, running costs, vehicle purchases and public transport – was the only contributor to the -0.6 percent monthly change in the CPI. StatsSA said the fuel index fell nearly 26 percent year on year as motorists paid far less to fill their tanks than they did a year ago.
FNB senior economist Siphamandla Mkhwanazi said the CPI fell for the third consecutive month on the aggressive decline in global oil prices.
Mkhwanazi said fuel prices in the country fell 25 percent in May compared with the similar period last year.
“Inflation for goods is almost non-existent at the moment, which is consistent with very low levels of demand, meaning that retailers are finding it extremely difficult to increase prices under these circumstances,” Mkhwanazi said. “Much of the existing inflation comes from services components … which are items that consumers have very little bargaining power on.”
Stats SA said only dairy products, as well as oils and fats, elevated the inflation rate slightly.
“The oils and fats index rose by 2.3 percent from April, recording an annual rise of 8.3 percent. Margarine prices saw a monthly increase of 3.6 percent,” the agency said. “Peanut butter was 5.8 percent more expensive in May compared with April, recording an annual rise of 16.3 percent.”
Stats SA said meat prices also inched 5.5 percent higher year on year, but registered a 0.1 percent fall during April and May. Stewing beef prices were 2.1 percent lower than they were in April. Food and non-alcoholic beverage prices edged up by a monthly average of 0.3 percent in May, for the third consecutive month.
PPS Investments portfolio manager Luigi Marinus said the slowdown indicated the lack of demand within the economy.
“The speed with which the inflation rate has moved from the midpoint of the target band to below the bottom of the band, notwithstanding the sizeable interest cuts that the SARB has implemented, highlights the lack of growth and the need for growth in South Africa. This provides more scope for additional interest rate cuts that at these inflation levels are almost inevitable,” Marinus said.