Consumer price inflation (CPI) ticked up in December, in line with expectations, but even with this increase analysts argue inflation is likely to remain muted in 2020.

Though it highlighted weak demand in a struggling economy, and could shore up the SA Reserve Bank’s room for more interest rate easing, some analysts expect it could hold off on further cuts until it can assess the effect of events, including the February budget and the review by ratings agency Moody’s Investors Service that follows in March.

The December figure, which came in at 4%, wraps up 2019, during which inflation for the full year averaged 4.1% — its lowest annual level since 2005.

This is on par with the Bank’s revised expectations that it would average 4.1% in 2019, and steadfastly below the 4.5% midpoint of its target range.

An easing inflationary outlook and weaker expectations for economic growth were the main reasons Bank governor Lesetja Kganyago cut interest rates last week. The central bank indicated that a second cut of 25 basis points could come in the fourth quarter of 2020.    

Inflation has been below the Bank’s mid point for sometime, said Maarten Ackerman, chief economist at Citadel, reflecting an economy “where there is almost no demand”.  

“Consumers are on their knees, business is struggling,” he said.

Given the expectations for inflation going forward, with the Bank revising its forecast for 2020 down to 4.7%, and poor growth, the Bank has room to cut rates by as much as 1%, argued Ackerman.

“We are probably in an environment of muted inflation until we fix the economy ... and that actually paves the way for the SARB to be a little bit more proactive in terms of  cutting rates,” he said.

Nevertheless, the Bank remained concerned about the fallout from a downgrade by Moody’s and the effect this could have on the rand. It suggested that it would not cut more aggressively than the 25 basis points pencilled in for later this year, Ackerman said.

December’s increase was driven by food and fuel prices, as well as prices for housing and utilities.

Transport inflation picked up to 3.3% in December from -0,3% in November, reflecting higher fuel prices, according to Stats SA. A 22c/l rise in the inland price of petrol between November and December pushed up the annual petrol price increase to R1.06, the agency said. Food and nonalcoholic beverages quickened at an annual rate of 3.9%, up from 3.5% in November.

Though inflation on housing and utilities slowed in December to 4.6% from 4.8% in November, it was still the largest contributor to December’s increase, adding 1.1 percentage points. Housing and utilities accounted for a substantial 24.62% weighting in the CPI basket.

“We expect headline CPI to continue drifting below the midpoint of the SARB’s inflation target band of 4.5% amid an inability to pass on material price increases to the consumer due to constrained consumer income growth,” said FNB Economist, Matlhodi Matsei.

Despite recent rand and oil price volatility, SA’s inflation remains well under control, said Stanlib chief economist Kevin Lings in a note. There is little evidence of any significant build-up of inflation pressure in the short term, he said. This partly reflected the weak economic environment, with most retailers struggling to maintain pricing power.

Nevertheless Lings expected rates to remain on hold until the Bank can assess the outcome of the budget, the Moody’s decision, the ANC’s midyear policy conference and the government’s progress in stabilising SAA and Eskom.


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