Inflation firmly under control

As predicted in a recent edition of “To the Point”, South Africa’s consumer price inflation (CPI) has fallen to well within the Reserve Bank’s target range of 3% to 6%.

Data released this week by Statistics SA confirms the fairly strong downward trajectory of most consumer prices, with the overall CPI dropping to 4.7%. The easing of inflationary pressures has been pronounced, with the latest CPI reading representing a whopping decline of 40% from its peak of 7.8% recorded in July last year.

Although the annualised inflation rate for goods remained just below the top target range, it declined from 6.3% in June to 5.5% in July. Services continue to lead the charge lower, with an annualised rate of inflation of only 4% (down from 4.5% in June).

The declining trend of the CPI was presaged by a sharp decline in the producer price index (PPI) since the middle of last year, as the PPI represents a leading indicator for future consumer inflation. The monetary policy authorities may have underestimated the extent and speed with which the PPI has dropped since its peak of 18% in July 2022 to only 4.8% in June 2023, which will almost certainly continue to send the CPI lower in coming months.

Lower producer prices have been made possible by lower oil prices than a year ago and the return to price stability in the global shipping industry. The latter is reflected in the latest reading of the Statista Global Container Freight Rate Index, which is 86% lower than the peak of $10,361 for a 40-foot container recorded in September 2021.

Closer scrutiny of the price increases for individual groups of consumer expenditure items reveals the major impact of housing and transport costs. In combination, the prices of these two items, which comprise almost one-third of the CPI basket, only increased by 0.3% year-on-year. Unfortunately, annualised price increases of food and non-alcoholic beverages, which represents 17% of the basket, remain stubbornly high, but have nevertheless moved to single-digit territory (on average).

July marked the first time since November 2021 that the Reserve Bank did not raise its benchmark interest rate, which was good news for existing and prospective new home owners alike. With a bit of luck, September’s meeting of the Monetary Policy Committee will signal the beginning of a more accommodating monetary policy stance, a change that is desperately required for the economy to continue on its path of recovery from Covid and the state capture era.

Combined with the new-found emphasis on a policy approach that involves greater participation by the private sector, lower interest rates could prove to be the trigger for a sustained phase of higher economic growth.