How the latest inflation figures will affect your pocket

2014-04-24 12:53

South Africans should brace themselves for another hike in interest rates, market analysts warned after the latest inflation figures were released by Stats SA.

March year-on-year annual inflation was released at 6%, 0.1 of a percentage point higher than February’s number, flirting on the psychological barrier meant to limit inflation within the acceptable 3% to 6% boundary.

“This puts the Reserve Bank in a difficult position. It’s a concern. We could see interest rates increasing by a 100 basis points,” said Chris Gilmour, Absa investment analyst.

Gilmour said consumers would feel the greatest impact: “The increase in interest rates, food prices and the last two increases in the petrol price are bound to make consumers reassess their spending. It doesn’t look good for consumers.”

Investec economist Kamilla Kaplan said household expenditure has weakened considerably since the second half of last year: “Prices of essential goods, especially municipal prices, have been hefty and consumer income has been eroded.”

She said consumers are currently unable to absorb higher prices so they are more likely to adjust where they spend their money. “This would be reflected in the decrease in sales volumes of goods and services,” which reduces the country’s gross domestic product (GDP).

South Africa is not only experiencing the brunt of high food and petrol prices, but a slowdown in economic activity. The Reserve Bank released its composite leading business cycle indicator yesterday. The indicator shows economic growth in South Africa decreased by 0.6% in February.

Chris Hart, chief investment strategist at Investment Solutions, said the slowdown in economic activity was a result of the mining sector strike, which has gone on for more than 13 weeks.

“Commodity prices are key in South Africa because the resource sector is the starting point of the economy. The mining sector has a multiplier effect on other sectors and the overall stability of the country.”

Hart said higher food prices are also a result of the weak rand: “We are having these negative results because of the weaker rand. The weak rand tells you we are sitting on a deficit, you don’t grow an economy when investors are leaving.”

He said the combination of increasing prices, the weak rand and reduced economic activity hints at the likelihood that Reserve Bank Governor Gill Marcus will increase interest rates.

Gilmour is in agreement and said Marcus would be tempted to increase rates, but warned the country was experiencing stagflation – where there is stagnant economic growth but increasing food and administered prices.

However, even with the dreary outlook, all three analysts believe South Africa has already experienced the worst of the downhill.

“In two, three months, the elections will be behind us, strikes will be behind us, we are near the end,” said Hart.

Gilmour and Kaplan said inflation is bound to moderate. In addition, they said, even though the rand is still weak, it had strengthened against major currencies; commodity prices have stabilised; and “we might see petrol prices decreasing in May”.

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