THE acceleration in inflation that began in March temporarily paused last month, Statistics SA data to be released on Wednesday is forecast to show. Inflation is expected to have remained unchanged at 4.5% year on year in May — the same figure as that recorded in April — according to a median consensus forecast from a Business Day survey of six economists.
Food and fuel prices would have been the main drivers of inflation, according to KADD Capital economist Elize Kruger. She assumed that while food inflation would have increased on a month-on-month basis, it probably continued to moderate year on year basis to 4.5% from 5% in April.
Unchanged inflation is unlikely to prevail with further acceleration expected from June amid rising oil and food costs. The petrol price rose 47c/l this month.
The moderation in food inflation is unlikely to last long given higher maize prices locally after a drought affected crop production.
Lower production means SA will need to import maize, particularly yellow maize, which it has already begun doing. The weak rand makes the situation worse as it raises the cost of imported commodities.
With oil now higher than it was at the beginning of the year, it costs more to import than if the rand was firmer.
Most analysts expect the oil price to edge higher and end the year at about $74/barrel.
The electricity tariff the National Energy Regulator of SA (Nersa) will grant Eskom later this month, for implementation next month, will play a major role in the inflation outlook. The Reserve BankECONOMIC WEEK: Inflation steady, but expect a price spikek already sees inflation breaching the 3% to 6% target in the first quarter of next year.
Although most analysts still expect interest rates to rise later in the year, a rate hike next month would not come as a surprise. Given the Bank has said future rate hikes would be moderate, what would be a surprise is any rate rise above 25 basis points. Although a rate increase would add more woes to over indebted consumers, its effect on the economy would be marginal. Unlike other previous monetary policy committee meetings, the July one will be very interesting as it looks set to be a close call.
The windfall from lower oil and fuel prices as well as lower inflation that consumers enjoyed in the first half of the year is dissipating. Fuel prices and inflation are now higher than earlier in the year, while electricity tariff increases are set to kick in next month.
SA’s avoiding sovereign credit ratings downgrades from two of the three major ratings agencies this month is welcome amid the recent spate of disappointing news. These include a continued decline in business confidence in the second quarter, contracting manufacturing output and a slowdown in mining production in April output. These data already point to the fact that economic growth got off to a slow start in the second quarter. Economic growth for the year is, however, still expected to be marginally above the 1.5% recorded last year.
Standard & Poor’s (S&P) affirmed SA’s sovereign credit rating of BBB-, the lowest investment-grade rating, and maintained the stable outlook as expected on Friday. This means policymakers will breathe a sigh of relief that borrowing costs remain unchanged. Fitch Ratings earlier also affirmed SA’s rating at BBB with a negative outlook.
If the issues raised by these agencies, such as weak economic growth, a large current account and budget deficit, and strikes are not addressed, they have warned that downgrades may follow in future.
S&P said in its review on Friday that the stable outlook reflected its view that a slight improvement in economic growth in 2015 to 2018 and continuing fiscal prudence would help contain SA’s fiscal and external balances.
[“source – bdlive.co.za”]