Increase in the CPI rate

The y-o-y CPI inflation rate rose for the first time in seven months in March to 4.0%, from its multi-year low of 3.9% in February, but encouragingly, slightly lower than the 4.1% consensus forecast. Nonetheless, it is likely that this represents the first of many subsequent increases over the course of the year.

There were two main countervailing influences on the direction of March's CPI inflation rate. On the one hand, the petrol price was raised by 96 cl, raising the petrol inflation rate by 5.0% and the overall CPI inflation rate by 0.3%. On the other hand, the food inflation rate declined by -0.6%, to a one-year low of 5.9%, knocking -0.1% off the CPI inflation rate. Excluding volatile petrol, food and electricity inflation, the so-called "core" or underlying inflation rate fell back marginally, to 5.7% in March from 5.8% in February.

The recent peak in the CPI inflation rate was 6.6% in May 2014. The increase in inflation had been expected mainly because of the 96 cl hike in petrol prices at the beginning of March. Even though petrol prices had also increased in March 2014, they had done so by a much more modest 36 cl at that time.

Nonetheless, there were a variety of important durable and semi-durable goods which experienced declines in inflation, including clothing and footwear, cars, furniture, appliances, illustrating just how little the depreciation of the Rand against the Dollar has ignited inflationary pressures amongst imported goods and instead illustrating the impact of the gains made by the Rand against the likes of the Euro and Yen, currencies of countries from which South Africa imports many such goods.

Importantly, March is the month in which education costs are measured and the education inflation rate rose quite sharply, a reflection of the premium being put on the demand for education as the vehicle through which employment becomes more easily attainable.

Unfortunately, the coming months are likely to see significant further increases in the CPI inflation rate as a result of the steep increase in fuel prices in April, the lagged effect of a rebound in food commodity prices as a result of drought conditions, as well as substantial increases in electricity tariffs. However, remaining inflationary pressures do not seem particularly threatening, based on these latest figures. Therefore, it remains unlikely that domestic interest rates will be raised in September at the earliest. At the same time, such a hike in interest rates is likely, given the probability that the inflation rate will be approaching the 6% upper end of the inflation target towards the end of the year.

Source : Key Points from Econometrix  22/04/2015

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