Picture: 123RF/LEON SWART
Picture: 123RF/LEON SWART

Inflation continued to hover close to multiyear lows, despite edging higher in June, data from Stats SA showed on Wednesday.

The increase took annual consumer inflation to 2.2% in June, up from its near 16-year low of 2.1% in May, and the second consecutive month that it has come in below the lower bound of the SA Reserve Bank’s target range of between 3% and 6%.

The June print suggests inflation has bottomed out, said economists and though it is likely to rise in the future, increases are still expected to remain fairly muted in the near term.

The monthly increase in inflation was 0.5% in June — a reversal of the -0.6% recorded between April and May, according to Stats SA, with fuel prices still a dominant feature in the changes recorded.

Stats SA said that though fuel prices increased 7.5% from May to June, fuel was still on average 20.9% cheaper than it was a year ago.

“This outcome confirms that May represents the lower turning point of the current headline inflation cycle,” independent economist Elize Kruger said.  

Kruger, however, flagged electricity price increases that will likely follow from Tuesday’s court victory by power utility Eskom over the electricity regulator. The court outcome will effectively let Eskom up its tariff revenues by R69bn, on top of other tariff clawbacks it has previously won against the regulator.

This will affect inflation and incorporating these developments could result in “a mild upward revision” to the Bank’s inflation forecasts at the time of the next MPC meeting, she said

This will further justify the argument that the space for further monetary policy loosening by the Bank, has run out, said Kruger.

Last week, after the meeting of its monetary policy committee (MPC) the Bank cut interest rates for a fifth consecutive time in 2020 to record lows of 3.5% as the economy continues to grapple with the ramifications of the Covid-19 pandemic and the lockdown.

The Bank’s decision to cut was not unanimous, however. Two MPC members voted to hold, while governor Lesetja Kganyago stressed that future decisions from the MPC would be highly data-dependent — hinting that the Bank's run of cuts had petered out.

He also indicated that the Bank had been aggressive in “front-loading” interest rate cuts but that the economic lockdown had made it difficult to understand the effect of the monetary policy accommodation thus far.

This benign inflation outlook as well as poor growth prospects point to there being room for further monetary easing by the Reserve Bank, said Nedbank economists Busisiwe Radebe and Nicky Weimar.

However, though there was a possibility of one more cut on the cards, the MPC’s recent split decisions underscored how difficult it is to make such as call they said, adding that their view “is for rates to remain on hold”.

The Bank revised its growth forecasts for the year, expecting a contraction of 7.3%, compared to its May forecast of a decline of 7.0%, while leaving its forecast for consumer price inflation unchanged at an average of 3.4% in 2020. It marginally lowered its forecast for the outer years, revising those down to 4.3% in 2021 and 2022.

The lockdown has severely affected Stats SA’s ability to collect information on prices, requiring it to use special methods to impute or calculate prices for certain goods and services. June saw SA move from level 4 lockdown restrictions to level 3, and the extent of imputation in this release is lower than that for April and May, Stats SA said.

Update: July 29 2020
This story has been updated throughout.


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