Fortunately, fuel prices appear to be the only recent negative surprise for inflation. The other bug bear for SA inflation, food prices, shows signs of moderating.Consumer inflation fell to 6,1% y/y in February (from 6,3% y/y in January) due to a substantial 0,6% m/m fall in food prices. As a result, annual food inflation has fallen to 10,1% from a recent peak of 11,6% y/y in December 2011. This ties in with recent comments from food retailers, who pointed to softer food inflation of late.
In recent years there have been big administered price hikes, where price increases have been set to fund capital expenditure, and with little regard to the inflation target. This has pushed through inflationary pressures.
However, there have been several positive developments of late. The ports regulator granted a below-inflation tariff hike of 5%, which will reduce import costs for consumer goods. Though the reduction in the Gauteng e-tolls is negative for the development of toll roads in SA, it is positive for the inflation outlook. Lastly, electricity regulator Nersa’s decision to reduce Eskom’s mandated price hike for the 2012/2013 financial year from 25% to 16% will reduce average inflation in the next 12 months by 0,2%-0,4%.
Put this all together and it seems there is little reason for the Reserve Bank to think about hiking interest rates. Unfortunately, the devil is very much in the detail.
As Bank governor Gill Marcus noted in a recent address, core inflation — which excludes petrol, electricity and food — has been ticking up. According to Marcus, this suggests “inflation is becoming more generalised, and may reflect the emergence of demand pressures. This is something that the Bank will monitor very carefully.”
As a result, she has left the market speculating about rate hikes.
An imminent rate hike is unlikely. Global growth is uncertain and local demand is slowing. According to the retail liaison committee, apparel sales growth slowed a bit in February and furniture and appliance sales growth was down quite dramatically.
While there is no doubt a strong element of a post-December 2011 hangover, the bottom line is that consumer spending is slowing. Though average inflation looks likely to be a little lower than previously forecast, it will still be at least one percentage point higher than it was in 2011. Add lower nominal wage growth this year — driven by government — and real income growth will be lower in 2012 than it was last year.
I don’t think, therefore, the Bank is going to hike interest rates any time soon.
But the Bank has hinted at a change of course in recent weeks. Marcus began to build the case for higher rates, citing the dangers of inflation to the poor: “It is difficult to find examples in history where sustained economic growth and high inflation went hand in hand. But it is easy to find glaring examples of high inflation contributing to socioeconomic dislocation.”
Several people have suggested that government will not be able to contain wage hikes ahead of this year’s ANC conference. But this may not necessarily be a bull case for the retail sector. While the rising petrol (or diesel) price will not alone induce a rate hike, higher than expected public-sector wage increases may be justification for higher interest rates.
Source : fm.co.za
Tags : petrol price, rise in petrol price, inflation, inflation South Africa
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