CPI in steady decline but too late in cycle for an interest rate cut

Today’s CPI inflation number was in line with market expectations at 5.7% year on year and 0.6% month on month. The number is consistent with a steady decline in the inflation rate from here onwards and we are confident that inflation will reach the midpoint of the target band towards the middle of the year.

A closer look at the detail shows that there is no inflationary pressure among food items and tradable goods, which amounts to almost half of the consumer basket. As a result of the technicalities in calculating the year on year inflation number, we now have to wait for this trend to run a full year before it becomes fully incorporated in the headline inflation number. That will happen by the middle of this year.

Another weighty component where inflationary pressures are benign is in the housing sector, largely because rental inflation is gradually trending down.

The electricity tariff increase recommended by Nersa, while it is the one obvious negative for inflation, is at least not as large as the amount requested by Eskom and by itself is not enough to offset the easing of inflationary pressures in the bulk of the consumer basket.

We don’t expect an interest rate cut on today, partly because the inflation forecast of the South African Reserve Bank has been too bearish up until now. The recent inflation releases will undoubtedly force the SARB to revise its inflation forecast, but it might be too late to affect interest rate policies as it is now a bit late in the global cycle to cut interest rates.