Consumers and prospective home owners would have been delighted by this week’s announcement of lower consumer inflation. The May reading of the consumer price index (CPI) came in at 6.3%, which is almost 20% lower than the peak of 7.8% recorded in July last year.
Importantly, the drop of 50 basis points from the April reading was more than the consensus amongst analysts of a 20 basis points drop and the CPI is now within striking distance of the Reserve Bank’s target range for inflation (3% to 6%).
One of the key reasons for the consistent decline in the CPI is the sharp downward trajectory of the country’s producer price index (PPI). The April reading of the PPI is good news for indebted households and businesses, having dropped from a multi-year high of 18% in July 2022 to 8.6% in April 2023 – representing a decline of 52%.
The PPI is a leading indicator for consumer prices and it is clear that the downward trend in producer prices has also started to filter through to the CPI, which is the overall benchmark for inflation.
A further decline in the PPI is anticipated in May, which may spell the end of the 18-month long rate hiking cycle of the Reserve Bank, which will bring welcome relief in the area of debt servicing costs. Although food prices remain stubbornly high, most of these have also started to decline from recent highs.
This is in line with a global trend that is related to lingering supply-side constraints imposed by the Covid pandemic, erratic and unpredictable weather, and Russia’s military invasion of Ukraine, which is now in its 16th month. These two countries are important suppliers of grain and concerns over the security of supply has served to raise demand beyond normalised levels.
When analysing the annualised price changes for key consumer groups, it is nevertheless clear that the downward pressure on the CPI is likely to continue. No fewer than 14 of the CPI groups have now recorded annualised price increases of below 6%.
In the event of food prices stabilising and eventually declining even modestly, this downward trajectory could gain considerable momentum before year-end. With some luck, hawkish monetary policy may have run its course and interest rates could be on their way down soon.
Arguably the best economic news emanating from the first quarter’s key economic data sets is in the labour market, where the relentless progress with employment creation witnessed a more than a quarter of a million new jobs, the bulk of which was created in the formal sectors.
Other good news includes the drive for new investment in renewable energy, especially solar power, which is taking off at an exponential rate, suggesting that meaningful relief from electricity rationing may occur later this year and into 2024.
The final silver lining is the hammering that the oil price is taking, which will place further downward pressure on inflation. A mediocre economic performance by China is one of the reasons for a dampening of the demand for oil. West Texas Intermediate oil was selling at $68 per barrel on 23 June, compared to $83 per barrel in mid-April – a drop of 17%.
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