What will affect inflation outlook?

2009-06-25 00:00

CONSUMER inflation in Pietermaritzburg appears to have stabilised and is now in line with the national Consumer Price Index (CPI), which declined to eight percent year on year in May.

According to the latest data from Statistics SA, CPI in Pietermaritzburg cooled to 8,4% in May. This is a significant improvement from 16,8% in August 2008. National CPI in April came in at 8,4% (y-y).

According to many experts, the data bode well for South Africans, who are no doubt hoping for a further 50 basis point interest rate cut. The Monetary Policy Committee (MPC) of the Reserve Bank announces its decision after 3 pm today.

The move will lower the prime interest rate to 10,5%.

However, some experts warn that this could be the final rate cut for some time, given the fact that consumer inflation remains “stubbornly high”.

Efficient Group economist Fanie Joubert warned that the incentive to save is being undermined as inflation is not falling as rapidly as the interest rate.

“The real interest rate [repo rate minus CPI] is now in negative territory, assuming [that] a consumer will be able to get a deposit rate equal to the repo rate as the average 12-month fixed deposit rate, using 10 leading banks in South Africa, was 7,2%. This limits the scope the MPC have to further rate decreases,” Joubert said.

Nedbank’s Group Economic Unit is more hopeful, noting that the MPC will focus on the recessionary conditions and the medium-term inflation outlook.

“We still forecast … the prime rate falling to 10% by September,” Nedbank said.

Increases in the prices of food, cars and household goods prevented a more rapid decline in consumer inflation in May.

Food and non-alcoholic beverages rose 12,3% (y-y), housing costs rose eight percent (y-y) and maintenance costs rose 15,1% (y-y), Joubert said.

Senior economist at Dynamic Wealth, Johan van Tonder, said a lack of competition in the South African economy is the main reason for the stubbornly high inflation rate.

“Look at the demand for durable goods, which is reducing drastically. Notwithstanding that drop in demand, the latest inflation rate for durable goods is around five percent,”he said.

kavith@witness.co.za

ECONOMISTS believe that several categories of products and services within the inflation basket remain a problem for consumers.

These include:

•Food prices, which remain robust (with the exception of a decline in February 2009). They are unlikely to soften over the next few months.

•The rand.

•Administered prices, including electricity, water, other municipal tariffs — and property taxes and levies.

•Services inflation.

•Wage costs.

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