Disappointing rise in inflation In August

Disappointingly, the y-o-y CPI inflation rate increased in August, to 6.4%, from 6.3% in July. Consensus forecasts had been expecting a decline in the y-o-y CPI inflation rate to 6.2%, and we had been expecting a decline in the CPI inflation rate to 6.1% in the month. Nonetheless, this was still down on a recent peak of 6.6% recorded in June.

The y-o-y inflation rate of durables increased to 4.5% in August, from 4.3% in July. This was slightly down on the recent peak of 4.6% in June. This indicates that although the rand exchange rate has stabilised in recent months, there may still be some upward pressure on the inflation rate of durable goods which are either fully imported or have a high imported component on the back of the Rand’s sharp depreciation in 2013.

Similarly, the y-o-y food inflation rate increased further in August, compared with July when a decline had been expected on account of the fact that prices of maize and other agricultural commodities have fallen sharply in recent months.

Nonetheless, there were declines in the inflation rates of other goods within the CPI inflation rate in August compared to July.

Even though the CPI inflation increased unexpectedly in August, it may decline once again in September given that the petrol inflation rate declined further in September. Furthermore, one continues to expect that inflationary pressures will continue to dissipate in coming months even though the CPI inflation rate may remain stubbornly high.

The Reserve Bank has highlighted the need to normalise interest rates i.e. bring them back above inflation. The unexpected rise in the CPI inflation rate in August has increased the chances that the Reserve Bank will opt to increase interest rates by 0.25% at the conclusion of its meeting on the 18th September. However, given ongoing weak economic activity, this is not a foregone conclusion.

Source : Econometrics

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