July CPI inflation slows but low income groups are still being hit by food price increases.

The July Consumer Price Index (CPI) year-on-year inflation rate slowed from a previous month’s 6.3% to 6.0%, thus sitting virtually in the 6% upper limit of the SARB’s (Reserve Bank) 3-6% inflation target range.

Both the CPI for Goods and the CPI for Services showed slowing inflation rates, but looking at CPIs for Key Product and Service Categories, the slowing in inflation was not broad based.

The Major Housing and Utilities CPI showed a significant slowing in inflation, from 6.5% previous to 5.8% in July. This was due to significant declines in the inflation rates for “Water and Other Services” (which includes municipal rates), from 9.8% year-on-year previous to 8.1%, and in “Electricity and Other Fuels”, from 11.3% previous to 7.4%.

On the CPI “Goods” side, the Transport CPI inflation rate slowed from 3.3% year-on-year in the previous month to 3,1%, reflective of greater petrol price year-on-year deflation in July, while the CPI for Recreation and Culture also saw its inflation rate slow.

The All-important CPI for Food and Non-Alcoholic Beverages did not “play ball”, however, with its inflation remaining troublesomely high at 11.3% year-on-year in July, up from the prior month’s 10.8% as the drought impact still feeds through into food prices.

The rampant inflation in this CPI sub-index is particularly problematic because of the disproportionately large impact it has on the poor, who spend a far greater proportion of their income on food than do the higher income groups. As a result, the CPI for the “Very Low Expenditure Group” (a good proxy for lowest income group”) remained the highest of the 5 expenditure quintiles in July, at 8% year-on-year, while the “Very High” Expenditure Group (the highest quintile) had the lowest inflation rate of 5.8%. CPI inflation is thus still hitting the poor far harder.

The good news is that slower overall CPI inflation, now looking to enter back into the SARB target range, lowers the risk of further interest rate hiking, and we are of the opinion that the SARB will keep interest rates on hold at the current level where Prime Rate is 10.5% as a result, in the near term.

From an employment point of view, however, the low inflation environment may be a little more troublesome, however, due to wage inflexibility.

The SARB Quarterly Bulletin quotes Andrew Levy as estimating an average wage settlement of 7.8% in the 1st quarter of 2016. Should average wage inflation remain significantly higher than general inflation in the economy, in such a weak growth environment where commercial sector “pricing power” is very weak and productivity improvements are tough to come by, the currently low inflation environment probably spells further “labour shedding” in the near term.

Therefore, while on the one hand slowing CPI inflation eats into Household Disposable Income less, all other things equal, thus translating into some support for disposable income growth in real terms, the outlook for Household Sector Disposable Income growth becomes less clear when one adds the wage inflexibility and potential employment loss aspect. www.eprop.co.za