The November CPI (Consumer Price Index) inflation rate edged slightly higher, from 4.7% year-on-year in the previous month to 4.8%, reports John Loos, FNB Home Loans household and property sector strategist.
Of the main sub-indices in the CPI, there was virtually no change in the Food and Non-Alcoholic Beverage inflation rate, remaining at 4.8% year-on-year in November. The big change was in the Transport Sub-Index, whose deflation rate diminished from -0.6% to 0%. This has much to do with diminished petrol price deflation, and was the key contributor to the slightly higher November CPI inflation rate.
The Education Sub-Index remains the one with the highest inflation rate of the major sub-indices, at 9.3% year-on-year, but was not surveyed in November, and so remained unchanged. The Housing CPI is arguably the most troublesome one because of its far bigger weight in the CPI, and with an inflation rate of 6.4% year-on-year influenced strongly by high inflation rates in Municipal Rates and Utilities Tariffs. Not many of the Housing CPI’s components were surveyed in November, however, so its 6.4% inflation rate is also unchanged from October.
Of the 4.8% total CPI inflation rate, the Housing CPI is the biggest contributor to the tune of 1.6 percentage points, followed by the other big ticket item, namely Food and Non-Alcoholic Beverages (0.7 of a percentage point).
IMPLICATIONS FOR INTEREST RATES
The gradual rise in CPI inflation offers little in the way of immediate pressures for the Reserve Bank’s Monetary Policy Committee.
We remain of the expectation that the bank will continue with its “upward normalization” in interest rates in 2016. However, the benign inflation situation is expected to allow it to continue to do this at a very slow pace which would not cause an undue “shock” to the consumer.
CPI INFLATION STILL TILTED AGAINST THE POOR
Examining the CPI Indices by “Expenditure Quintile”, Expenditure Quintile 1, i.e. the lowest spending level group, which more-or-less correlates to the lowest income group, continues to have the highest CPI inflation rate of 5.3%. The next quintile up, i.e. Quintile 2, had a slightly lower rate of 5%.
At the lowest end of the inflation spectrum is Quintile 4, the 2nd highest Expenditure Quintile, with a 4.5% inflation rate, while Quintiles 3 and 5 both have slightly worse inflation rates of 4.7% and 4.8% respectively.
Why do the lowest Expenditure groups have the highest CPI inflation rates? Often, it can be the large weighting that the lower groups have for food in their expenditure basket. However, with Food Price inflation at 4.8% currently, in line with the overall CPI inflation rate, this can’t be seen as a key source of upward pressure.
A key apparent reason at present thus appears to be the high Public Transport Weighting in the expenditure basket of the lower income groups, along with their low Private Transport weighting.
This difference in weightings becomes important when one considers the difference between the inflation rate for the CPI – Private Transport, which deflated year-on-year by -4.2% in November, versus the CPI for Public Transport, which inflated by 1.98%. The heavier dependence by the lower expenditure groups on public transport, and less in private transport, means that they have benefited far less from the major petrol price deflation that has happened during 2015.
In short, the high income groups benefited far more from the petrol price deflation earlier in the year.
REAL HOUSE PRICES
The CPI inflation rate of 4.8% year-on-year in November, coupled with our FNB House Price Index inflation rate of 7.2%, implies that house prices continued to rise in real terms (when adjusted for CPI inflation), last month to the tune of 2.3% year-on-year.
IMPLICATIONS AND OUTLOOK
The November CPI inflation rate, which was only marginally up from the previous month and still very much in the middle of the SARB 3-6% target range, does little to change our expectation of interest rates continuing to be nudged higher at a very slow pace in 2016.
The potential impact on near term housing demand growth, therefore, is likely to be limited. However, we remain expectant that housing demand growth will slow, but more due to a multi-year stagnation in economic growth which started back in 2012. Inflation at present is less of a concern than possibly recessionary conditions looming.
The CPI inflation rate is likely to rise only gradually in the near term. There are two key possible sources of upward pressure. First, although global oil prices remain depressed, high base effects from 2014, which caused huge year-on-year petrol price deflation this year, will subside as time goes by.
But of more concern is the current drought, and the possible upward pressure that this could exert on certain foodstuffs in the near term.
While food price inflation has yet to become troublesome in the most recent CPI numbers, the Producer Price Inflation (PPI) rate for Agriculture already hovers above 7% year-on-year as at October, suggesting some upward pressure on the Food CPI to come.
Any renewed food price inflation surge would be a key concern due to its potential upward pressure on the inflation rate for the lower income groups. This is undesirable at a time when social tensions are running high and at risk of manifesting themselves in activity that can be disruptive to the economy (aggressive strike action, service delivery protests and the like).