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CPI drops to its lowest level in eight years

 

 

The consumer price inflation (CPI) has come in at its lowest level in eight years, at an annual 3.7% as measured in October, down from 4.1% in September, according to Statistics South Africa (Stats SA).

The last time the CPI was at 3.7%, was in February 2011.

Dennis Dyke, the chief economist at Nedbank, said the drop is much lower than the 3.9% number expected by the market. Dyke said the lower inflation maybe gives the South African Reserve Bank (SARB) ability to relax policy.

He said the lower CPI is encouraging as it has come down without any special factors like a big collapse in oil prices or recovery in the rand. But Dyke cautioned that the lower CPI is also the result of a weak economy.

Portfolio manager at First National Bank, Wayne McCurrie, said the Central Bank had the view it must maintain higher interest rates to attract capital to South Africa, which keeps the rand stable and allows the government to issue debt.

When you cut interest rates, the rand becomes less attractive and investors steer clear as they earn less on their investments. McCurrie said the dilemma for the monetary policy committee (MPC) is that if it does not cut rates, the economy will not grow. “If the economy does not grow, who would want to come and invest here?”

“Normally the danger of cutting interest rate is that the inflation will go up because people will spend more. But under current economic conditions and today’s inflation number, higher inflation is not a risk that the Reserve Bank has to worry about,” he said.

Factors that contributed to the lower CPI were food and non-alcoholic beverages; housing and utilities; and miscellaneous goods and services.

McCurrie said inflation has not been this low in the longest time. “The economy is weak and no manufacturer or retailer can actually push price increases,” he said.

McCurrie said the low CPI is also due to a relatively stable rand. He thinks the SARB should cut interest rates by half a percentage point.

Its MPC will make a decision on interest rates on Thursday at its final meeting for the year.

McCurrie said other countries were cutting rates too. “But I am not 100% sure that the Reserve Bank will cut interest rates because they are truly concerned about the deficit and the overall government debt.”

Stats SA said the drop in the annual rate is mainly the result of increases between September and October 2018 moving out of the 12 month window of the year-on-year inflation rate.

Notable amongst these was the R1 per litre increase in fuel price which took the inland 95 octane price to R17.80  a litre last year October while, this year the price is lower at R16.21 a litre.

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Tshegofatso Mathe
Tshegofatso Mathe is a financial trainee journalist at the Mail & Guardian

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