ASHA SPECKMAN: Food price moderation puts inflation on a diet

26 May 2019 - 00:06


Stats SA delivered bittersweet news about easing consumer prices this week. It is good to know that steak is nearly 5% cheaper than a year ago and that inflation on stewing beef - a staple for hearty stews in winter - has slowed to 5.4% since April last year.
But how much comfort is that for consumers who have, for some time, been juggling financial priorities to keep their heads above water?
The latest consumer price index, published on Wednesday, notes sizeable increases only on bacon, biltong and sausages.
Overall annual food inflation continued to moderate to 2.3% in April, though the prices of vegetables, fruit, bread and cereals, fish, sweets and fuel continued to accelerate.
The unabated disinflation - a decline in the rate of inflation - coupled with weak demand has anchored inflation within the Reserve Bank's target range of 3%-6% over the past two years. As a result, economists continue to call on the Bank's monetary policy committee (MPC) to consider cutting interest rates. This would give consumers much-needed breathing room and hopefully stimulate spending, which consumer-facing companies are desperate for.
The central bank may itself get some breathing space if the US cuts interest rates later this year if inflation in that country continues to languish. The US Federal Reserve targets 2% inflation over the long term. A president of one of the 12 reserve banks that constitute the US central bank this week suggested that US interest rates may be cut later this year. That country's benchmark inflation rate rose to 2% in April from 1.9% the month before.
Lesetja Kganyago, SA' s Reserve Bank governor, and his emerging-market peers may view such a development with relief as it reduces the pressure to take action in their jurisdictions as the risk of liquidity gravitating away from emerging markets towards safe havens, in particular the dollar, wanes.
But they may also take a sceptical view of forecasts of lower US interest rates amid the brewing trade war between the US and China, which has made markets jittery and created a volatile environment for currencies.The US Federal open market committee, the equivalent of our MPC, meets next month, and then the trajectory of US interest rates will be clearer. With regard to SA, however, economists remain divided over the direction of interest rates.A UK research firm, Capital Economics, has a contrarian view and is forecasting a cut spurred by downward inflation well into 2019 and weak economic growth.The Reserve Bank expects inflation, which slowed to 4.4% in April, to average 4.5% this year and rise next year.This would be partly due to high administered prices, specifically electricity. So it is pointless to cut rates only to raise them again soon.Kganyago has always maintained that he is not an inflation nutter, but circumstances outside his control highlight how powerless even he is to sweeten this sour economy.

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