Although inflation, as measured by the consumer price index (CPI) increased marginally from 4.8% to 5.4% in September, there should be no need for alarm over another potential interest rate hike.
The single most important observation from scrutiny of the latest CPI reading, published on 18 October, is the sharp drop in two of the major items in the consumer spending basket, namely food and transport. Collectively, these two items represent almost one-third of the weighting for calculating the CPI.
A mere six months ago the annualised price inflation for food & beverages was running at 14% but has now dropped to 8.1% and seems destined to decline even further before the end of the year. For transport, which includes the purchase of vehicles, fuel, and public transport, the annualised price increase dropped from 8.9% in March to only 4.2% in September – a decline of more than 50%.
A second key observation is the continued stability of the largest item under housing costs, namely owners’ equivalent rent, which remains at a level below 3%, which is the bottom of the Reserve Bank’s target range for inflation. This item is the third largest item in the CPI basket, representing 13% of the overall weighting.
Looking ahead, a combination of further downward momentum in food prices and a measure of stability for transport and housing costs should lead to the CPI remaining comfortably within the target range.
Furthermore, there is a good chance of some downward movement for other CPI items with a weighting of more than 1% of the consumption basket. These are listed in the table. Electricity was one of the major culprits in September, but load-shedding has prompted many households to partially switch to alternative energy sources, which means the weighting for electricity is bound to be adjusted downward at the next revision of the consumer spending baskets for the different income groups.
Viewed against the backdrop of the sharp drop in the Altron-Fintech Household Resilience Index (AFHRI) since the beginning of last year and the consistent decline in the country’s average real salary, the Reserve Bank would do well to end its interest rate hiking cycle and rather focus on some relief for millions of indebted South Africans, particularly those with mortgage bonds.