Nedbank Consumer Inflation Report

The much anticipated decline in consumer inflation turned out to be less dramatic than the market had expected. This was due to a number of factors. First more price surveys are now conducted in January than was previously the case. This was the main reason behind the larger than the normal seasonal increases in the recreation and culture category as well as other services (part of the miscellaneous goods and services category). The 7,4% m-o-m increase in other services was due to an higher in funeral expenses.

Second there were unusually large rises in categories that have recently shown little evidence of price pressures. The clothing and footwear as well as the household contents and services category, which have experienced very modest price rises over past few months, as retailers limited price increases due to dwindling demand, rose surprisingly sharply over the month. Clothing and footwear rose by 0,9% m-o-m, compared with an average increase of 0,2% in the past three months. However, this does not include sale items so it gives an overinflated picture of the actual increase in clothing prices. Household contents rose by 1,2%, compared with the average increase over the past three months of 0,3%. This was due to a steep increase in the cost of appliances (up 4,6% m-o-m), which was mainly due to the impact of a weaker rand on imported electronic equipment and white goods.

Food also rose strongly over the month, mainly due to the sharp increase in the cost of fruit (4,2% m-o-m) and vegetables (6,9% m-o-m).

Lower fuel prices, which now has a reduced weight in the overall basket, provided the only significant relief,
falling by 18,8% m-o-m.

Note:
The significant discrepancy between CPIX and new CPI in 2003 to 2005 (see graph) is due to StatsSA using
mortgage interest costs as a substitute for housing costs over the period. This was because the new rental
survey only started in January 2008. In order to make the two series more comparable, StatsSA should
perhaps have used rental inflation as a proxy for owner equivalent rent.

Outlook
Inflation is forecast to moderate over the coming months and is expected to move below the target range by the middle of the year. By December inflation will probably move briefly outside the target range, mainly due to technical factors relating to the sharp decline in oil prices in late 2008.

Services inflation, which now has a bigger weight in the new basket, should continue to ease at a slower pace compared with headline inflation, due to the backward looking manner in which prices are set. The pace of decline for goods inflation may also turn out to be slower than originally expected, due to the lower weightings of food and fuel.

Overall, the risk to the inflation outlook lies on the downside. Should conditions both locally and globally
deteriorate further, the drop in inflation could turn out to be steeper than anticipated as retailers may opt to cut prices in order to try and keep goods moving off their shelves. A weaker rand could still provide some upside risk, but barring a massive depreciation, retailers will probably opt to cut margins rather than put up prices and see demand dwindle further.

Implications
Today’s inflation figure was somewhat disappointing, but does not significantly alter our inflation forecast or our view that the Reserve Bank will opt to continue front loading interest rate cuts. Yesterday’s worse-thanexpected gdp figure along with expectations that the economy will deteriorate further adds impetus to the need to cut rates sooner rather than later. With the April MPC meeting over a month and a half away there is a good probability that an interim meeting will be held if evidence of a further deterioration in the economy accumulates. Over the course of the remainder of the year we expect a 350 to 400 basis point decline in rates.