CPI inflation rate increases again

Key Points

  • The y-o-y headline CPI inflation rate increased to 5.0% in July, from 4.7% in June. This was exactly in line with consensus forecasts but slightly above our forecast of 4.9%. This marked the fifth consecutive month in which the CPI inflation rate increased.
  • This was in part a function of an increase in the petrol inflation rate and a rise in electricity prices for consumers.
  • In July, the y-o-y food inflation rate edged upwards to 4.4% from 4.3% in June. One is still likely to see significant increases in the food inflation rate in coming months in lagged response to earlier rises in agricultural futures prices on domestic markets. This is a risk to the outlook for inflation.
  • Nonetheless, there were sources of downward pressure on the July CPI inflation rate in line with the fact that demand within the domestic economy is currently      very weak. This has been reflected in the low PPI inflation rate and the wholesale and manufacturing inflation rates which at times was even negative. This reflects a situation in which pricing power is under significant pressure from low levels of demand in the economy.
  • The core inflation rate remained unchanged in July at 5.5% compared with June.    
  • At  the conclusion of its meeting in July, the Reserve Bank hiked the repo rate by 0.25% despite the fact that inflation came in lower than expected in June and that real economic indicators have been suggesting that economic activity domestically is very weak. By doing this, the Reserve Bank has given the impression that it intends raising interest rates to positive levels in real terms as a means of preventing distortions in the economy and protecting the Rand.
  • Consequently, one suspects that interest rates will be raised by another 0.25% before the end of the year and possibly in September, especially if the US starts raising interest rates for the first time in seven years. Furthermore, the repo rate is likely to raised before year-end given that the Rand has depreciated by 5% on a trade weighted basis recently.

All these speculations were before the drop in stock markets across the world on the 24/08/2015

       Source : Econometrix 19/08/2015

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