Ayanda Shezi

Economics Correspondent

FOR the second consecutive month consumer inflation has slowed, presenting further ammunition for those wanting the Reserve Bank to cut interest rates at its monetary policy committee meeting in April.

However, a number of factors could result in the Bank maintaining its cautious stance of leaving rates steady.

The expansionary budget unveiled by Finance Minister Trevor Manuel yesterday could mean rates will remain unchanged at 7,5% for longer, to avoid fuelling inflationary pressures. Manuel expects an expansion in economic growth of between 4% and 4,5% over the next three years.

Strong domestic demand and uncertainty about the outlook of the rand could also provide a reason for interest rates to be left constant in April.

The Bank’s targeted measure of inflation CPIX (consumer inflation excluding mortgage costs) slowed year-on-year to 3,6% in January, from 4,3% in December. Economists say the 0,5% month-on -month increase is mild, considering that January is a high survey month.

Transport costs are the main reason for lower consumer inflation, falling 3% during February.

This was largely on the back of the 44c/l decline in fuel prices at the beginning of January, as a result of a stronger rand and lower global oil prices.

Transport has a weighting of 15,3% in the CPIX basket of goods.

The strength of the rand has largely cushioned the strength of global oil prices, which recently traded higher than $50 a barrel.

The rand is also expected to continue to boost the inflation outlook as the dollar continues to weaken.

"The direction of oil prices has risen steadily since December," says Absa economist Karen Ford.

Ford says given the rand’s slight depreciation in February, it is likely that fuel price increases will stoke inflation in the coming month.

In his budget statement Manuel announced a 10c/l increase in fuel prices from April.

"However, the increases in oil and petrol prices over the short-term are not expected to pose any significant threats to interest rates or inflation trends," says Ford.

The monthly increase in the index for non-food items was benign at 0,1%. Economists say CPIX could have come in even lower, but for the surprise increase in food prices.

Food prices increased 0,9% month on month, but on an annual basis slowed to 1,4%. Vegetables (4,1%) and fruit and nuts (2,7%) were the main contributors to the month on month increase.

"The silver lining around the food price cloud is the fact that the bulk of these increases were seasonal increases," says Vector Securities chief economist Johan Rossouw.

The seasonally adjusted food price index increased only 0,2%. Maize prices rose 0,8% month on month, despite lower prices in maize futures since November last year. Prices have fallen to below R600 a ton.

The prices of sugar (0,9%), dairy products (0,7%), meat (0,6%) and fish (0,6%) also increased during the month.

"The increases are not justifiable as secondary pressures emanating from transport costs, as these have not been rising consistently every month," says Absa economist Monica Ambrosi.

Medical care and health expenses made the biggest contribution to CPIX, rising 6,2% during the month, and adding a 0,6 percentage point to the monthly increase.

Ambrosi says another positive in the inflation numbers is the fact that services inflation, which has a weighting of 33,76% in the CPIX basket, fell to 5,9% year on year in January, despite increasing 1,7% month on month. This is the first time that services inflation has been below 6% since inflation targeting was adopted in 2000.

"Given that a strong rand largely accounts for the decline in goods inflation and that most worries about inflation pressures have been centred on the movement in service prices, this bodes well for the inflation outlook," Ambrosi says.

The monetary policy committee could find itself in a bind if it does not react to the latest inflation figures by cutting interest rates, says Efficient Group chief economist Dawie Roodt.

"If CPIX moves below the 3% level, consumers and politicians alike will demand some answers on the reasons for allowing CPIX to move below the lower limit while the economic growth could be stimulated even further, by lower interest rates," he says.