Inflation drops to lowest level in six years

SOUTH Africa’s headline consumer price index (CPI) annual inflation rate eased to 6.3 percent year-on-year in February as the current account deficit narrowed in the fourth quarter of 2016 to its lowest in nearly six years, helped by a surge in mining exports.

Data from Statistics SA (Stats SA) yesterday showed that inflation came down 0.3 percent lower than the 6.6 percent recorded in January.

The agency said food inflation dropped after climbing to record highs last year on the back of drought.

It said year-on-year basis, food price inflation slowed to 10 percent from the 11.8 percent recorded in January.

Stats SA said meat prices increased 1.6 percent monthon-month, while bread and cereal prices dropped 0.3 percent month-on-month.

Core inflation, which excludes the prices of food, non-alcoholic beverages, petrol and energy, dropped to 5.2 percent year-on-year in February from 5.5 percent.

On a month-on-month basis, it rose to 1.1 percent from 0.3 percent.

MMI Investments and Savings economist Sanisha Packirisamy said meat prices were expected to show continued upward pressure in coming months as farmers rebuild their herds after a period of higher-than-normal culling levels brought about by the drought.

“We do, however, expect this to be offset by a further fall in bread and cereal prices which should lead to lower food inflation, overall, in 2017,” said Packirisamy.

Interest rates

Economists said while the slowing down of the CPI provided a good reason for the Reserve Bank to keep interest rates unchanged at the moment, the rate remained above the bank’s target range of 3 to 6 percent.

Laura Campbell of Econometrix said while the decline was further evidence that the inflation cycle was on a downward trend, it would not influence the Reserve Bank to review its monetary policies.

“The decline in the CPI inflation rate in February and the corresponding decline in the core reading may heighten calls for interest rates to be cut,” said Campbell. “However, the fact remains that the CPI inflation rate remains above the upper end of the 3 percent to 6 percent inflation target.”

Steel and Engineering Industries Federation of South Africa chief economist Tafadzwa Chibanguza said the CPI figures and the rand’s strength could prompt the Reserve Bank to keep the interest rates unchanged at its monetary policy meeting next week.

“The rand is doing a lot of work for the Monetary Policy Committee of the Reserve Bank,” said Chibanguza. NKC African Economics senior economist Elize Kruger said the headline consumer inflation cycle reached an upper turning point in December, and was expected to moderate further this year. “We forecast average headline inflation at 5.7 percent over the whole of this year, compared to 6.4 percent in 2016,” said Kruger.

The Reserve Bank said the current account deficit narrowed to 1.7 percent of the gross domestic product in the last quarter of last year – the lowest shortfall since the first quarter of 2011.