Rise in fuel cost could offset food price drop

Lower food prices have helped contain inflation, but a rise in the cost of fuel in May could offset this, figures to be released this week are expected to show.

Inflation slowed for a third month running, to 5.3% in April, largely because of lower food prices. Lower inflation could provide an impetus for the Reserve Bank’s monetary policy committee to cut interest rates as early as July, some economists have said.

But they expect a slight uptick in inflation in May due to a 30c-a-litre increase in the price of diesel and a 49c-a-litre rise in petrol during the month.

Food and transport are major contributors to the Statistics SA inflation basket.

Agricultural activity has improved consistently after an end to the drought in most of the country. The agricultural sector expanded, despite a slight decline in confidence during the second quarter, the Agbiz/IDC Agribusiness confidence index showed last week.

May’s fuel increase was caused by a slight depreciation in the rand from March to April, to R13.51 to the dollar, from R12.91/$ previously.

Elize Kruger, senior economist at NKC African Economics, forecasts inflation of 5.4% for May. Trading Economics has predicted 6% for the second quarter.

“On food prices, the moderation will continue,” said Kruger, who expected a slowdown to 5%.

She said the “case is definitely building” for an interest rate cut in July if the rand had not weakened by the time the Reserve Bank’s monetary policy committee meets to decide on rates.

However, Nomura economist Peter AttardMontalto said “investors that expect weaker GDP data as a reason to cut rates imminently view the MPC as far too shorttermist or backward-looking”. He said the MPC would only cut rates when inflation falls to below 5%.

Inflation data will be published on Wednesday. It will be preceded by the release of tourism accommodation figures on Monday and tourism and migration trends on Tuesday. Tourism is a large job-creation sector. It was affected by the 5.9% slump in trade GDP in the first quarter when the economy slipped into technical recession.

Kruger said SA remained an attractive travel destination if the rand continues to trade at around R13 to the dollar, although the Knysna fires will be negative for tourism in that area.

In its bulletin on Tuesday, the Reserve Bank will update its quarterly review of key economic data, including the current account deficit.

The central bank will also publish business cycle indicators on the same day. The leading indicator gauges economic growth over the next 12 months. It rose 1.1% in February but fell 0.4% in March.

THE CASE IS BUILDING FOR A RATE CUT IN JULY IF THE RAND IS NOT WEAKER BY THAT TIME