Inflation slows down: 5 reasons not to get too carried away

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Bloemfontein, 26January 2015 - The necessity to put food on the table has seen an unemployed Bloemfontein woman become a successful entrepreneur in her own right.

JOHANNESBURG - The annual consumer inflation rate came in at 4.4 percent in January 2015, down from 5.3 percent in December 2014. When one considers that inflation had risen above the upper target of 6 percent for five months last year, this is quite a feat. The last time that inflation was this low was in early 2011, when CPI ranged between 3.7 percent and 4.5 percent from January to May of that year. On a month-on-month basis, between December 2014 and January 2015, prices fell by 0.2 percent.

Despite this:

Food inflation is still quite high

On a year-on-year basis, food inflation slowed down from 7.2 percent to 6.5 percent. This is still a pretty significant number as it is the most important expenditure item for many households. Prices for meat rose by 8.7 percent, dairy products by 12.1 percent and fish by 7.1 percent.

The poor pay more

StatsSA breaks down the population into five quintiles, based on their level of expenditure.  Households in the lowest quintile spend up to R21 399 per year, whilst those in the top quintile spend R142 084 or more.

The inflation rate for the poorest households is higher than those at the top of the pyramid. Prices faced by the average households in the bottom quintile increased by 5.6 percent. Inflation for the top quintile was 4.3 percent, slightly below the average rate. The lowest inflation rate was faced by households in the second highest quintile, at 4.2 percent. Inflation is lower the better off you are.

Not in our hands

The fall in inflation is driven by international crude oil prices. This is most apparent in transport. According to StatsSA, the transport index decreased by 3 percent between December 2014 and January 2015, mainly due to a 127c/litre decrease in the price of petrol. CPI excluding petrol would have been at 6 percent, right on target. But this is a purely external factor over which South Africa has no control. It is not a reflection of policy or demand and supply conditions within the country.

Of course, being an open economy, there will be many developments that affect the economy that are driven by decisions taken elsewhere. In this case, it seems the windfall may not last long as oil prices are on an upward trend. The AA has warned by petrol prices may increase by about 68 cents a litre in March.

Unregulated administered prices race ahead, and some regulated ones too

On the whole, administered prices are looking good, with prices falling by 1.4 percent. Administered prices include those for water, electricity and tertiary education. They tend to be influenced by government or set without reference to market forces.

Not all administered prices are regulated. In fact, unregulated administered prices increased by a whopping 7.9 percent. But even regulated prices scored high inflation, with CPI for electricity and other fuels at 7 percent, and for water and other services at 8.5 percent.

Interest rates will eventually have to go up

This low inflation phase means official interest rates don’t have to go up in March. But with the US economy showing strength, its central bank will start raising interest rates later this year, drawing investors back to the world’s largest economy. When that happens, the South African Reserve Bank will have to follow suit should investors react by pulling money out of the country.