Twelve and counting…

Karen Smith, economist at Absa Group reports that the release of April’s inflation data saw CPIX inflation remaining within the target range for the 12th consecutive month.

With the exception of two months, headline consumer price inflation in South Africa has been lower than that of the US’s since October 2003. Pipeline inflationary pressures in the US are currently exerting upward pressure on US interest rates.

On the other hand, with inflation rate expectations apparently moving lower and some pressure on the supply-side of the economy emerging, the SARB may well opt for a further slight easing in interest rates.

As a result, the interest rate differential between South Africa and the US is narrowing, thereby providing lessened support for the rand.

The underlying factors contributing to higher inflation rates in April were:

* Over the surveyed period, the contraction in food prices (gauged by the average cost of maize and sugar) was countered by the slight depreciation of the rand against the dollar.

* CPI inflation was higher given that the impact of the recent 50 basis point rate cut will only have an effect on May’s inflation data.

* Measured at a year-on-year rate, the price of brent crude oil in the first seven days of April (when the survey was done) was 66,7% higher than the corresponding period last year.

This translated into a 40c increase (up 8,7% y/y) in the pump price of petrol, bringing it to R5,02 per litre in April.

Although oil prices have eased, the effect of the weaker rand could negate the extent of petrol price reductions in forthcoming months.

* Although current CPIX inflation may add weight to calls for a further interest rate, the SARB’s MPC may opt to postpone such a decision given the recent weakening in the USD/ZAR exchange rate.