Inflation could hit top end of Bank’s target

INFLATION as measured by the consumer price index (CPI) is expected to have increased to the top end of the Reserve Bank’s 3% to 6% target last month, signalling elevated price pressures at the end of the first quarter.

A poll of economists by Business Day expects inflation to have risen to 6% last month compared with March last year (year on year) after increasing to 5.9% year on year in February amid pressure from health insurance and fuel costs. Statistics SA will publish the latest inflation data on Wednesday.

Fuel prices are still expected to have added upward pressure on inflation last month following an 81c/ l jump in the petrol price. Petrol now has a higher weight in the CPI basket than it did last year.

Increases in school fees, rentals, and domestic worker wages have also been identified among factors that will see inflation rise.

“We anticipate a temporary breach of the inflation target but we do not think this will change the Reserve Bank’s view on interest rates. In any case, there is not much a rate cut will do to curb supply-side inflation,” Frost & Sullivan economist Craig Parker said.

March is regarded as a high survey month, which usually means higher CPI outcomes.

Absa Capital economist Peter Worthington said last month was a big month for the local CPI as Stats SA sampled the prices of goods and services that were not measured every month, such as motor vehicle insurance and school fees.

Absa Capital forecast that consumer prices will increase 1.3% during the month to deliver a 6% year-on-year CPI inflation rate.

Despite inflation being expected to be at the upper end of the target band last month, the recent recovery of the rand against the dollar from its weakest levels seen last month, and some softening in international oil prices are the latest developments supportive of inflation easing back into the target band later.

“Inflation should go back within the target. The major consideration there is the rand.

“We think it is still going to recover slightly as we move forward,” Mr Parker said.

The rand weakened to R9.36/$ in the middle of last month, its weakest level in four years, but has since recouped some of the losses to levels of around R8.91/$.

The Reserve Bank last month identified the depreciation of the rand and higher petrol prices as the main reasons for its forecast for inflation to breach the upper end of the target range at a 6.3% average in the third quarter.

The appreciation of the rand against the dollar and expectations for petrol prices to fall next month, all bode well for a downward revision of the Reserve Bank’s inflation forecasts.

Stats SA will also release retail sales on Wednesday. Although not market moving, retail trade sales are a key gauge of consumption spending in the economy.

Growth in retail sales is expected to have slowed to 1.6% year on year in February from 1.9% year on year in January, according to a poll of economists surveyed by Business Day.

“In February, consumers would still have been recovering from December and January spending obligations such as school fees and books. But going into March, there will likely be an uptick in spending due to holidays in that month,” Spark ATM Systems operations manager Ryan Tzamtzis said.