A rising interest rate cycle looms...
A couple of days ago Statistics SA announced better than expected consumer inflation for February 2012. Headline CPI inflation rose by just 0.6% month-on-month, while the annual rate of inflation eased to 6.1% year-on-year, versus 6.3% in January. “At 6.1
StanLib economist Kevin Lings observed that the number was well below the Bloomberg market expectation for an increase of 6.4% y/y. What contributed to this unexpected improvement? “Overall, we think that the upward momentum in domestic food price inflation, which became very evident in early 2011, has peaked and should ease in the second half of 2012; helped by lower international food prices,” he said. So food prices are coming down?
As is often the case the measured inflation experience seems to contradict price movements on the ground. And while Roux agrees “that the peak in food inflation may be behind us” the reality is that inflationary pressures remain due to currency risk and inflation-plus increases in administered prices. “There are some signs of rand pass-through amongst goods with high import content, said Roux. “But there are stronger signs of imported inflation in luxury items such as higher-end personal care products.” It seems, therefore, that administered prices pose a greater risk than either food inflation or currency devaluation over the near term.
Burning cash at the pumps...
“A worrying component of inflation remains the petrol price,” said Lings. February 2012 petrol price inflation stood at 21.7% y/y and added a staggering 0.1 percentage points to the monthly rise in inflation. Petrol prices were adjusted upward in March 2012 (by 28c/litre) and are forecast to spike as much as 62c/l in April. “The April rise comprises a 20c/l increase in the fuel levy, an 8c/l jump in the Road Accident Fund, a 4c/l pipeline charge and an [estimated] 30c/l under-recovery on the petrol price,” he said. Gauteng-based consumers face another “inflation” stumbling block. Joe Average faces as much as R550/month in additional taxes if the 30 April 2012 implementation date for the South African National Roads Agency (Sanral) e-Tolling system is met.
The “to toll or not” debate has raged for months now… Although government insists the toll will go ahead – and out-of-province citizens are generally unsympathetic – there is something unsavoury about a tax that increases the marginal tax rate on a low income earner from 18% to 22.4% (based on frequent traveller who receives R150, 000 per annum in the 2012 tax year). The impact reduces as you move up the income chain… But even someone earning R360, 000 per annum will suffer a 1.8% increase in marginal tax rate, from 24.3% to 26.14%.
The petrol price increase and toll fees (for Gauteng residents) will impact individual budgets, but have little impact on overall inflation. An early study by economist Mike Schussler, of economists.co.za, found that the Gauteng tolling would add only 0.4% to CPI… And Lings pointed out that large monthly increases in the petrol price should not impact on the annual rate of petrol inflation due to so-called base effects. “The extent to which administered prices [and the softer rand] impact core/underlying inflation will be heavily influenced by the strength of the domestic economy; which is currently growing at a steady pace; but is not sufficiently vibrant for companies to easily pass-on cost increases,” concluded Lings.
Timing of the next interest rate hike is anyone’s guess
Why should you care about the inflation and interest rate outlooks? The answer is that inflation plays a crucial role in long-term financial planning calculations and many retirees rely on interest income to “get by”. There is also a continuous trade off between economic growth, inflation and interest rates in the domestic economy. Because the Reserve Bank applies an inflation targeting policy any prolonged period of high inflation could trigger the next rising interest rate cycle. History shows that interest rate hikes can be swift and severe – and there is little doubt that struggling consumers will be knocked over if interest rates begin rising sooner than expected. When will interest rates begin an upward march?
Economists have repeated “pushed out” their forecast date for the next rate hike. “SA inflation is now expected to rise to a peak of 6.5% y/y in the coming months,” said Lings. “Despite recent hawkish statements from the governor of the Reserve Bank, this should not pose a significant concern for the monetary authorities.” He believes that in an environment where global economic activity is subdued and global inflation remains moderate, most central banks will retain historically low interest rates. This means that the Reserve Bank should leave interest rates unchanged through 2012.
“The Monetary Policy Committee (MPC) will find comfort from the February 2012 CPI number, as the data confirms that inflation is largely due to supply shocks and should gradually unwind,” agreed Roux. “But the latest number has allayed market expectations that the first rate hike may be before year-end.”
Editor’s thoughts: Local consumers have struggled over the past three years, trying to reduce their debt burdens through some of the toughest economic times on record. Aside from rampant food price inflation (through 2011) and multi-year inflation-plus hikes in the price of electricity, fuel and water consumers in the country’s economic powerhouse (Gauteng) will have to chip in up to R550/month on tolls. Can your clients accommodate an additional R550/month in taxes, or will they have to divert funds from their discretionary expenditure budget? Add your comment below, or send it to [email protected]
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