Higher oil prices and inflation put easing of interest rates in question
HIGHER oil prices pushed inflation slightly higher in June, putting the SA Reserve Bank (SARB) further into a dilemma over whether to continue easing interest rates to historic lows.
Last month, the central bank slashed interest rates for the fifth consecutive time this year, despite a split that saw two members of the Monetary Policy Committee voting against the decision.
Statistics South Africa (StatsSA) said yesterday that consumer price index (CPI) inflation lifted moderately in June following slower fuel price deflation in May, but remained firmly within the lower end of the SARB’s target range of between 3 percent and 6 percent.
StatsSA said inflation ticked up slightly to 2.2 percent from 2.1 percent in May. This was a reversal of the 0.6 percent decline recorded between April and May during the strictest levels of the nationwide lockdown.
Growth in consumer prices fell to its lowest level in more than 15 years in May as spending slowed amid the lockdown.
SARB reduced the short-term interest rate by a further 25 basis points to 3.5 percent two weeks ago after inflation dipped to a 16-year low in May but emphasised that its direction in the future could be highly dependent on prevailing data. The bank has modelled a further 25 basis point decline this year, given downside risks to its inflation forecast, which is expected to average 3.4 percent in 2020.
StatsSA’s chief director for price statistics, Patrick Kelly, said the dominance of the fuel price increased 7.5 percent in the past few months, pushing inflation higher.
Kelly said petrol increased 9.9 percent and diesel by just under 2 percent in June by R1.18 and 21 cents per litre respectively. “Despite these monthly increases, fuel is 20 percent cheaper now than it was a year ago,” Kelly said. “For example, motorists paid R16.76 per litre for inland 95-octane petrol in June 2019. A year later, the price was R13.40 per litre.”
StatsSA said five out of the 10 food categories reported annual rates higher than the average rate for food and non-alcoholic beverages.
The main contributors to the June inflation print were food and non-alcoholic beverages, housing and utilities, transport, and miscellaneous goods and services.
Investec’s Kamilla Kaplan said the economy was still in a recessionary territory, with depressed consumer spending.
Annual food and non-alcoholic beverages inflation was 4.2 percent in June, slightly lower than May’s 4.4 percent.
Meat prices increased by 5.2 percent, these have been slower since April while dairy products reached an increase of 6.4 percent, down from 7.1 percent in May.
Core inflation – which is measured by CPI excluding food and non-alcoholic beverages, fuel and energy – moderated to 3 percent year on year in June from 3.1 percent in May.