Strong disinflationary pressures will keep CPI lower for longer

At 4.8%, CPI inflation surprised the market yet again. Although a good headline number, the real story is in the detail. This is the first time since we have started forecasting inflation that every single item came in better than our expectations and I expect this was probably the case across the market.

Food was fractionally up on the month, but going back to April last year, food prices are largely unchanged over the twelve months. We may even see a bit of food deflation in the months to come, which will be a first for South Africa!

The more readily tradable items in the basket also showed signs of negative inflation. Vehicle prices were negative on the month. We have now seen a couple of negative months for this item, which has contributed to relatively flat vehicle prices over the year. A broadly similar picture applies to items like clothing, furniture, appliances, recreational equipment and household consumables. Telecommunication equipment prices are now down 26% on the year.

Are there any signs of World Cup-related inflation? Not in the hospitality industry, where prices are relatively flat on the month. On the public transport front, however, there are perhaps the first tentative signs of World Cup-related pricing.

Looking ahead, we see inflation bottoming at around 4% in the second half of the year. Most analysts probably expect inflation to move sharply higher from then onwards as electricity and other utility tariff increases kick in. Today’s number, however, suggests that the disinflationary pressures are strong and that we may have a more extended period of well-behaved inflation. While today’s CPI release is not enough to convince the MPC to cut rates further, it suggests we may have an unusually long period of low interest rates.