Inflation down on fuel and food prices

INFLATION slowed to its lowest rate since April 2011 at 4.4% last month compared to a year ago as lower fuel prices and slower increases in food inflation offered relief.

The inflation data support the case for stable interest rates for at least the next few months, which will offer overindebted consumers some respite.

The 4.4% also means inflation began the year well within the 3%-6% target band.

The Reserve Bank said last month it expected inflation to remain within the band for the rest of the year.

Economists also expect inflation to remain within the band this year despite a recent rise in oil prices, a weaker rand and a drought that threatens to see food inflation accelerate.

“The oil price has declined to such an extent that even if it increases by another $10 a barrel, it still would not lead to a breach in the target band,” Renaissance economist Thabi Leoka said.

Oil prices reached $115 a barrel in the middle of last year and fell to about $45 later in the year into last month, to about $62 a barrel yesterday.

Investec chief economist Annabel Bishop expected the Brent crude oil price to average $55 a barrel this year.

A R1.27c a litre drop in the petrol price contributed to the deceleration in inflation. The petrol price fell 93c/ l more this month, suggesting that inflation remained well within the target band this month as well.

But fuel will rise next month, indicating higher inflation is on the cards. Petrol prices are expected to rise by 70c/ l.

The pickup in inflation was likely to be at a moderate pace in the second quarter as the effects of higher fuel prices and a weaker rand fed through, said Ned- bank economist Isaac Matshego. Despite this, Nedbank expected inflation to remain “well within” the target band this year.

Food inflation will also play a role in how inflation performs in future. Ms Leoka said food inflation was not slowing as quickly as anticipated but that “lags associated with food prices and base effects” would help keep inflation within the target band.

Annual food inflation moderated from 7.4% in December last year to 6.6% last month.

Ms Bishop said the maize price had risen to R4,280 a tonne from R3,617 a tonne in September last year on dry weather conditions, indicating that food price inflation might start to rise this year.

THERE is a big difference between deflation — which is a generalised decline in prices — and disinflation, which is a slowdown in the rate at which prices are going up. Deflation is bad for an economy, because people tend to postpone spending in the hope that prices will fall further.

Disinflation, however, is good and fortunately this is what SA has — albeit not nearly enough of it and not necessarily for long.

And though the fall in January’s headline inflation to the lowest level in almost four years is encouraging, yesterday’s figures from Statistics SA suggest that underlying price pressures in the economy are as strong as ever.

They indicate too that the Reserve Bank’s Monetary Policy Committee (MPC) was right last month to not consider seriously the option of cutting interest rates.

With global oil prices now back in the $60 a barrel range, and the rand somewhat weaker, the question now is when will the MPC next hike rates?

Another question too will be how trade unions see the inflation trajectory — and to what extent disinflation might affect the outcome of wage negotiations, particularly in the public sector.

The latest figures show headline consumer price inflation slowed more sharply than the market had expected, to 4.4% in January, from 5.3% in December.

That’s mainly thanks to the significant fuel price cuts, which will help to bring the inflation rate down again in February. Lower food price inflation has also helped.

Inflation won’t stay that low for long, however — petrol price increases are expected again next month, and hot weather, drought and rising maize prices could start to drive food prices up again later in the year.

Nor is there any indication at this stage that prices across the rest of the economy are falling in response to the lower fuel prices. January’s increase from 5.7% to 5.8% in core inflation — which excludes volatile fuel, energy and food prices — shows that other prices in SA’s somewhat inflexible economy remain as sticky as ever.

For now then, the outlook is that headline inflation will bottom out in the second quarter of this year. Cadiz’ Adenaan Hardien expects a low of 3.5% in April and for it to average at about 4.1%-4.2% for the year as a whole.

That’s nicely below the middle of the 3%-6% inflation target range, creating the space for the MPC to “pause” in its hiking cycle, as it promised at last month’s meeting. But for how long? HSBC economist David Faulkner, who has pencilled in only weak gross domestic product growth this year, doesn’t expect an interest rate hike before next year. Likewise Mr Hardien. Nedbank’s economists expect a rate rise only in November this year, depending on the rand and oil prices. But Investec’s Annabel Bishop sees a 25 basis point hike as early as July this year, but then no more until next year.

The divergent forecasts reflect just how uncertain the environment is, globally and locally.

The rand remains vulnerable, particularly to whatever the US Federal Reserve might do and when. No-one is too sure where geopolitics and supply and demand factors might take the oil price.

None of these are factors over which SA has much control. What we could and should be looking to, however, is creating an economy that is more competitive and more responsive to benign market moves, so that we can derive more benefit when global prices fall. That would require, too, that businesses and labour unions are more responsive when it comes to the pricing of goods and services, and that of labour.