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CPI drops; retail sales increase

Markets caught off-guard by the lower-than-expected CPI numbers.


NASTASSIA ARENDSE:  Data from Statistics SA show that CPI dropped to 3.8% year on year in March, from the 4% that we saw in February. This was primarily on the back of a decline in the fuel-price pressure and sustained low food-price inflation.

I spoke to Tsitsi Hatendi Matika, who is the head of retail investment at Absa Wealth.

TSITSI HATENDI MATIKA:  This was a massive surprise for everyone in the market. The market had 4.1%, we at Absa had 4.2%. So 3.8% year on year for headline CPI was a major surprise.

NASTASSIA ARENDSE:  In terms of contributions to that number, what were they?

TSITSI HATENDI MATIKA:  The biggest downside pressures that came through were food and non-alcoholic beverages, which printed at 0.6% from 0.7% last the contribution to the … day number. In terms of alcoholic beverages, that contributed 0.3% versus 4% last time. And then transport contributed 0.4% versus 0.5% in February. So these are the three major contributors to that surprise number.

NASTASSIA ARENDSE:  Because fuel-price pressures could intensify, probably from this month onwards, are you expecting that to have an effect on CPI and, if so, what would that be?

TSITSI HATENDI MATIKA:  Yes, absolutely. Transport being one of the bigger components of CPI, we saw an increase in April for pump prices, with 69c/litre for petrol and 65c/litre for diesel. So that should add a significant amount to CPI. And then also with VAT kicking in on April 1, that is also going to put some pressure on CPI. So in total we anticipate 0.6% being added to what we had as our annual figures before VAT came through in the budget.

NASTASSIA ARENDSE:  Because the rate of food-price inflation declined further in March, I think for the tenth consecutive month, to about 3.6% year on year, what effect will that have if you are looking at food-price inflation for the next few months? Are you expecting it to moderate?

TSITSI HATENDI MATIKA:  It’s definitely expected to moderate. We find that there’s an expectation that meat prices will start increasing, and this is on the back of a lot of supply in the market that is going to start dwindling. There were also base effects where prices were much higher last year because of the drought. And, given the changes we are now seeing coming through, the smaller increases will start seeping through into the food inflation.

NASTASSIA ARENDSE:  What’s your base scenario when it comes to core inflation? I think it’s stayed at around 4.1% unchanged year on year. Are you expecting it to continue throughout?

TSITSI HATENDI MATIKA:  Core inflation has continued to surprise on the downside. What we have seen before is massive increases coming through when the rand changed. But because we’ve seen the rand much stronger that anticipated, and also the … has become more muted that it used to be in previous years. So core inflation is definitely surprising us to the downside.

NASTASSIA ARENDSE:  Another figure that came out of StatsSA today was the retails sales numbers. Did you get a  chance to glance at those?

TSITSI HATENDI MATIKA:  Yes, I took a quick glance. But it’s also quite interesting to see how retail sales continued to stay buoyant. And it’s also quite positive, given that we’ve had mixed data. So mining was positive, manufacturing was negative. It’s good to see that retail sales was on the positive side. This also will seep through into GDP data for Q1. So that’s quite an important  trend, showing consumer confidence is quite high with the changes that we are seeing coming from the President, coming from more positive sentiment in general.

NASTASSIA ARENDSE:  The next Sarb committee meeting, if I’m not mistaken, is scheduled to take place on May 24. Taking into consideration the figures we’ve got today, what other information data-wise needs to come out for them to make decisions and see what they do with the interest rate?

TSITSI HATENDI MATIKA:  The MPC always looks much longer than just the prints that come out prior to the meeting. Important things would be to see where the rand comes out between the period when they last met and where they meet the next time. And their forecast for the currency is around R11.97/dollar for the rand and those are the current levels where the rand is. Important will also be oil. The oil price was below $70/barrel the last time they met, and that’s been above $70 in the past few days.

I think they’ll also look at what they think will be up ahead. As we’ve discussed, the petrol price that will come through, those will impact CPI. I think they’ll look through VAT; they said that’s a once-off, and they look through first-round effects. They think more about second-round effects and what they are seeing. So there is quite a lot and they did say that everything data-dependent.

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