Lower inflation augurs well

NEWS WORTH KNOWING SINCE 1985

The last time consumer price inflation was below 4% was in early 2011, so the 3.8% outcome for March was a welcome sight. The market had expected inflation to rise to 4.1%; instead it declined, thanks to lower fuel and food price inflation as well as slower inflation in items such as education, particularly higher education.

It’s always a good sign when inflation figures are surprising on the downside, because it tends to indicate that price pressures in the economy are moderating in ways the economists haven’t even factored in yet.

And the fact that core inflation has been coming in below expectations and for the past three months has been hovering at 4.1%, below the 4.5% midpoint of the inflation target range, is a good sign too.

So unusually low an inflation number is bound to get people hoping there will be more interest rate cuts, after the monetary policy committee opted in March, after some heated debate, to cut the rate by 25 basis points. They need, of course, to remember that the 3.8% is the past, not the future, and the committee must make its decisions based on where inflation is going over the next few years, not where it is coming from.

That doesn’t mean the lower-than-expected March figure doesn’t make a difference. Importantly, it will mean the increase in the value-added tax (VAT) rate from 14% to 15% and April’s steep hikes in fuel levies and excise taxes now come on a lower base. So instead of inflation heading up to well more than 5% over the next 12 months as the new VAT rate bites, it is at least possible that it might stay below 5%.

Even so, the risks, as economists say, are to the upside and people should not hold their breath in the expectation of further interest rate cuts soon. The postdrought dividend for food prices is coming to an end and with food prices now coming off a lower base, food price inflation could pick up.

Fuel prices are an even bigger issue: the 52c hike in the fuel levy is one factor, but even more of a factor could be an upward trend in global oil prices. Oil prices hit their highest level since 2014 on Thursday, with Brent more than $74 a barrel, up 8% for the year to date.

Add to that some rand depreciation and fuel price hikes can again be expected to drive inflation upwards in 2018. The rand exchange rate is one of the biggest unknowns: there is still the possibility that a spike in global risk aversion could prompt tumult in emerging market currencies, including SA’s, so that is one the committee will be watching — along with a few other unknowns, such as electricity prices.

All of that is likely to see inflation climb for the rest of 2018, settling in the 5% range, although it is quite possible the outcome could turn out to be more benign than the Reserve Bank’s improved forecasts in March.

Inflation expectations are, however, still closer to 6% than to the 4.5% midpoint of the target range and Bank governor Lesetja Kganyago has repeatedly made it clear he wants to see inflation expectations drop towards the midpoint. With inflationary pressure having subsided and growth looking better, this is a good time for the committee to start massaging expectations down, so that businesses and trade unions start targeting much lower wage and price increases, pulling inflation down towards the midpoint sustainably, benefiting households while making the economy more competitive.

While growth projections for 2018 and 2019 are edging up, these are not yet anywhere near desirable levels. But monetary policy can’t provide the kind of stimulus that’s needed to lift growth to more than 2% and ideally more than 3%. For that, the government needs to keep at it and implement the structural reforms it is promising, so making it attractive for the investors, whom President Cyril Ramaphosa and his “lions” are going out to charm, to come into SA with their billions of dollars.

PEOPLE SHOULD NOT HOLD THEIR BREATH IN THE EXPECTATION OF FURTHER INTEREST RATE CUTS SOON