The latest CPI inflation rates have been released, but experts believe it will not have an impact on the repo rate, which is expected to remain unchanged.
According to the latest Consumer Price Index (CPI) information released by Statistics South Africa (
Stats SA) this week, annual CPI was 4.7% in October 2015, which is higher than the 4.6% experienced in September 2015.
John Loos, household and property sector strategist for First National Bank (FNB) Home Loans, said: “Housing CPI remains the key ‘troublesome’ part of CPI inflation (although many of its components were not surveyed in October), but perhaps of more concern is that the lower income groups continue to have higher CPI inflation.”
Peter Attard Montalto, research analyst at Nomura, noted that the CPI results released by Stats SA does not change his forecast of a rate hike by the South African Reserve Bank (SARB). The Monetary Policy Committee (MPC) will announce the new repo rate later this afternoon (19 November 2015).
The CPI results
According to Loos, CPI inflation is still a problem for the poor. The data reveals that the lowest spending level group (which has a strong correlation to the lowest income group) experiences the highest CPI inflation rate of 5.34%. By comparison, the next level up has a slightly lower CPI inflation rate of five percent. The higher spending groups have lower CPI inflation rates, with the second highest spending group experiencing the lowest rate at 4.4%.
Loos explained that there are two apparent reasons for the lowest spending groups having the highest CPI inflation rates. The first is that food price inflation has an inflation rate that is slightly higher than the overall CPI inflation rate, which “has a huge weighting in the CPI of the lowest expenditure quintiles,” noted Loos.
Montalto pointed out that the positive surprises revealed in the CPI results with regards to non-core components came from food. “Staple goods such as fats and vegetables showed particular increases (with faster pass-through from drought conditions compared with say meat), as well as fish. Grain products continue to slowly increase, but have not broken higher yet as expected on higher raw commodity prices.”
The second reason is that these lower spending groups have a larger weighting in public transport, whereas higher expenditure groups rely more on private transport. “The Public Transport CPI has not been deflating this year as a result of sharply lower petrol prices, whereas the Private Transport Running Cost CPI has been deflating,” said Loos.
As a result, Loos noted that high income earners therefore benefited more from the petrol price deflation experienced earlier this year.
“Looking into the detail of the data, a concern must be the higher inflation rate for the lower income groups, at a time when social tensions are running high and at a risk of manifesting themselves in activity that can be disruptive to the economy (aggressive strike action, service delivery protests and the like),” highlighted Loos.
Montalto predicted that CPI will peak at 6.7% in February 2016. He highlighted that service prices and food are going to be key drivers going forward, however, there are two risks. The first comes from wages and expectations. The second is with regards to food prices and the drought.
However, Montalto pointed out: “Food is interesting in the sense that even with this drought we are not forecasting a break out in food price inflation of ten percent odd. The issue here is that while there is immense pressure on local food prices, globally food prices are not hugely elevated thanks to better conditions globally. So while food price inflation moves higher as local prices of raw goods move to import parity that global level is not as high as it might be. However, we can see upside risks here are very strong in food prices if there are supply shortages locally and import parity becomes less important.”
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Impact on the repo rate
With regards to the SARB announcement of the repo rate, Montalto noted that the CPI data has had no real impact on his view of what the SARB will announce this afternoon. “We think the SARB will still focus on medium-run inflation risks, expectations and wages fears, upside skew in the inflation forecast etc.
“However, [today’s] decision is still ultimately about risk management with respect to the FOMC lift-off in December and our gut instinct of the marginal MPC member on if it is worth taking the risk of not hiking [today] and the FOMC going in December. We don’t think the MPC will take that risk and will hike by 25 basis points (0.5%).”
Loos stated: “Our expected MPC interest rate decision [today] is one of an unchanged Repo Rate.
“The slightly higher CPI inflation rate in October remains well within the three to six percent target range, and it wouldn’t appear that this number would influence a different decision to what we expect,” added Loos.
