[TOP STORY] CPI seems stuck at around 7.2%

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SIMON BROWN: I’m chatting now with Dr Chris Harmse from CH Economics. Chris, I always appreciate the early morning. The consumer price index (CPI) data came out locally yesterday – 7.2% inflation locally. It seems sticky, it seems stuck. Is it just sort of the food, the fuel, Eskom – or is there perhaps something else that I’m completely missing here?

Dr CHRIS HARMSE: Morning, Simon. No, I think you’re a hundred percent correct. Those three items dominate the inflation basket. If you just look at the contribution of them to the total of the new 7.2% rate, food contributes 2.1%, transport 2%, and then of course household expenses, which would include of course your electricity, etc also around that, so it contributes 1%. So 5.1% of the 7.2% [is contributed by] only those three items.

The others are very steady and also coming down. Things like health, recreation and culture are also very low. Things like communication are negative at this stage. Restaurants and hotels also. I see that hotel fees are now lower year on year; I think it’s just to get customers. But it’s sticky.

And because of the global situation around food, the exchange rate of the rand, and we all know about the oil [price] – although petrol prices are starting to come down – and we all know now about the new shocker of the [18.65% Eskom tariff hike]. So if you look at prospects, they are sticky. [They are] not coming down like what is happening in the US.

The US went far higher than South Africa. That went up to about 9%, whereas we only touched on about 7.8%, 7.9%. And now the US is already back on what, [6.5%] and coming down quickly. So [inflation] is sticky. And those three items are dominating the whole basket with the worrying effect of 12.4% on food, which is staying there month on month.

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SIMON BROWN: That was it, the household. Eskom is not coming down, as you mentioned. We’ve got another giant [electricity tariff] increase coming there. Transport – maybe. We had a nice [fuel price] cut in January, although the rand and fuel are beyond our control. Food inflation, as you say, is staying higher. I chatted with Wandile Sihlobo from Agbiz last week, and he was saying it might start edging down. But it does suggest to me that getting our inflation back into that 3% to 6% band is going to take a little more time.

And then with a [Sarb] MPC meeting next week the question is not ‘Are we going to have an [interest] rate increase?’ It almost becomes ‘Is it going to be a half or a quarter?’

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Dr CHRIS HARMSE: Yes, a hundred percent. So these are the two big questions. The number one is on transport. I still believe [that on] transport three or four months ago the year-on-year increase here was around 30%, and it’s now coming down; it’s now 13.9% year on year.

SIMON BROWN: So we’re winning.

Dr CHRIS HARMSE: So the basic effects will start to kick in. It’s a question of a month or two [for] the basic effects to start to kick in. And now especially diesel has gone down by about R4/litre over the last two months, and we expect this at the beginning of February to go down by about at least another 50 cents.

Then it depends on what the [finance] minister is going to do in his budget. I think this year he’s definitely going to increase the tax on fuel. He spared us last year. He’s definitely not going to [spare us] this year. So that also will be contributing.

And then of course that big [18.65%] in April will increase the inflation rate on its own by 0.6%. So this thing is going to stick [at] around 7%. Maybe it will start to come down, given the base effects, to about 6% in the next three to four months.

The problem [for] the Monetary Policy Committee is not inflation, it’s not [the] inflation basket. They could have kept the rate at the current level for the last two meetings at least. The problem is the rand.

If the governor is not going to increase rates, [and] if the US also increases, then unfortunately two things will happen here. You’ll have an outflow of capital, and the rand can depreciate seriously – and we all know it’s a dangerous cycle again. Then everything else will go up again, and the inflation rate will go up again.

So he has this predicament. We were [ahead of] of the cycle. We started to increase our rates long before the US did. The question is now can we be a bit [ahead of] the cycle, starting to decrease rates before the US does? Because my projections and my calculations – and there are  a lot of other economists feeling the same – are that the rate of inflation will be as low as 4% and even lower by the fourth quarter of this year. So must the Reserve Bank already start on the cycle to decrease? That’s the predicament.

Now we know that the Federal Reserve is meeting at the end of the month – 31 January to 1 February – and the projection now is 0.5% for the US, so we may follow, also with 0.5%.

SIMON BROWN: Yes, following the US because food, transport and household are not demand-driven, but keeping track. As you said, we are protecting our currency, and ultimately we are protecting the longer term if our currency collapses.

Dr Chris Harmse of CH Economics, I always appreciate the insights.

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