CPI likely to fall below target band if rand strength persists

CPI inflation has taken the market by surprise yet again. While expectations were for an increase of 0.2% on the month, the actual number was 0.1%. This is now the twelfth time in a row that inflation has been better than anticipated! To illustrate, August is a month when telecommunication rates are surveyed. Most of us had expected an increase in the order of 1%, while the actual number came in at 0.2%. This was a pattern that repeated itself once you dig into the details.

Vehicle prices were yet again negative on the month and prices are now on average lower than a year ago.

So where do we go from here? CPI inflation is now at 3.5%, which is only marginally above the bottom end of the target range. Next month we should see inflation at around 3.3%, which begins to beg the question: will we go through the bottom of the target range? This will depend largely on the currency, but if the rand remains at current levels of around R7 to the dollar until year-end, it is almost certain that we will see inflation fall below 3%. That raises the debate about further interest rate relief and will tilt the balance in favour of another cut.