Consumer inflation rose at faster pace in January
Despite inflation coming in at 4.5% in January, it has been at or below the midpoint of the Reserve Bank’s target range since December 2018
Consumer inflation rose at a faster pace in January due to higher fuel prices, Stats SA data showed on Wednesday.
Despite the annual rate of increase accelerating to 4.5% from a year ago, a seven-month high, January’s print means inflation has remained at or below the midpoint of the SA Reserve Bank’s target range since December 2018. The Bank cut interest rates in January by 25 basis points and is due to next decide on policy on March 19.
March’s monetary policy committee (MPC) meeting will come after a closely watched budget but before Moody’s Investors Service releases its review, which could see SA’s rating cut to junk. Moody’s is the last major ratings company to have SA at investment grade.
Still, with further fuel price declines forecast for March a case is building for the Bank to revise its inflation forecasts for 2020 downwards, said independent economist Elize Kruger.
The Bank expects inflation to average 4.7% in 2020.
Kruger also argued that the Bank, which expects the economy to expand by 1.2% in 2020, may have to revise down its growth forecasts. Moody’s recently joined bodies such as the World Bank and IMF in reducing their expectations for SA’s growth to below 1% this year.
While consumer price inflation increased in January 2020, it still marks the fourteenth consecutive month that year-on-year inflation was at, or below the midpoint of the target band of 3-6%. Reezwana Sumad, of Nedbank CIB shares her analysis with Business Day TV.
A potential downward revision to consumer inflation forecasts, and a cut to its GDP expectations could leave the Bank in “a difficult predicament”, she said.
The “jackpot question” will be whether the Bank waits to see what Moody’s decides or whether the economic conditions carry more weight, Kruger argued.
At its last meeting the Bank’s modelling suggested another rate cut could come in the fourth quarter of the year. But the Bank has repeatedly underlined heightened fiscal risk, and the potential fallout from a Moody’s downgrade as a reason for its caution.
MPC member Chris Loewald told MPs on Monday that “rising country risk” could put upward pressure on rates.
It would put the Bank in “quite an awkward position” if it cut rates ahead of the Moody’s decision, and then there was a larger than expected market reaction to a downgrade, said Momentum Investments economist Sanisha Packirisamy.
January’s print was just shy of market expectations, which saw inflation coming in at 4.6%, according to a Bloomberg survey. The transport component was the main driver, with fuel prices rising 13.7% on an annual basis.
This was because of statistical base effects, said Investec economist Kamilla Kaplan, specifically a sharp drop petrol and diesel prices in January 2019. “The fuel price decrease in January 2020 was comparatively much smaller,” she said in a note, translating to double digit year-on-year growth.
Food and nonalcoholic beverages, which makes up about 17% of the CPI basket, increased by 3.7% year-on-year, contributing 0.6 of a percentage point to the total annual rate. But this was a slowdown from December where food prices increased 3.9%.
“Food price growth is expected to remain contained on slower maize and meat price inflation in the coming months,” Kaplan said.