FNB – February CPI inflation remained in 'freefall' impacting more positively on higher income earning households

A sharply declining Consumer Price Index (CPI) inflation rate remains a big plus for constrained households, especially for the higher income groups at present

Consumer Price Index (CPI) inflation recorded 3.9% year-on-year for February 2015, which reflects another significant drop from the January 4.4% rate, and is now sharply down on the 6.4% high of August 2014.
The main contributing CPI sub-index to this sharp drop in inflation is the Transport sub-index, which has been driven lower by the sharp decline in global oil prices since earlier last year.

However, it is not all about oil prices. Global food prices, too, have declined, and this has had some impact in terms of containing the often troublesome CPI for Food and Non-Alcoholic Beverages inflation rate.

The result of the 2 impacts has been a massive drop in the CPI for Transport Sub-Index inflation rate from +8.9% year-on-year in May 2014 to a -6.3% year-on-year decline by February 2015. The weightier CPI for Food and Beverages inflation rate has slowed by a smaller magnitude, from a 9.4% high in August 2014 to 6.4% by February.

Of the major CPI sub-indices, the CPI for Education remains the most troublesome at 8.7%, although this index is not surveyed monthly.


• The obvious potential implication is that this lowly CPI inflation number is not expected to motivate the SARB (Reserve Bank) to hike interest rates any time soon. Our forecast remains for sideways movement in interest rates for the rest of 2015, and the resumption of mild interest rate hiking once more only in the 1st half of 2016 as the impact of the oil price drop wears thin and CPI inflation normalizes upward once more.

• The sharply lower CPI inflation rate is likely to mean that Real Household Disposable Income growth strengthens further in the 1st quarter of 2015. We saw quarter-on-quarter annualized Real Disposable Income growth accelerating very slightly in the final quarter of 2014 to 1.9% from a previous quarter’s 1.7%. While the economy remains mired in mediocrity, sharply lower inflation alone should imply stronger real disposable income growth for households nevertheless.

• The drop in transport costs has been felt far more in the area of private transport, as the drop in petrol prices is immediately passed on to the user, which is not necessarily the case in the area of public transport.

The CPI for Petrol dropped year-on-year by -26.7% in February, resulting in a -20.54% drop in overall private transport operational costs. Public Transport, however, sees its CPI still inflating by 6%, albeit marginally slower than the 7.8% rate back in November

• The implication of a smaller inflation decline in the area of public transport, as well as a more muted slowdown in food inflation relative to petrol prices, implies that the “direct” impact of the CPI inflation drop has been more positive for the higher income/expenditure groups to date, although all groups have benefited positively.

So, whereas the Lowest Expenditure Quintile (Quintile 1) has seen its CPI inflation rate drop from 6.8% in May last year to 5.6% by February 2015, Expenditure Quintile 5 (the Highest Expenditure/Income growth) has seen a far bigger drop from a high of 6.6% to 3.8%, while Quintile 4’s CPI inflation rate has gone from a similar 6.7% high to 3.7% by February 2015.

We do have to emphasize, however, that the indirect impact of lower overall CPI inflation can be more in favour of lower income groups insofar as it can contribute to stronger economic growth and job creation. In addition, part of the positive impact for the higher income groups is negated by recent budget announcements of personal tax increases skewed a little more against these groups than previously was the case.

In the coming months, we may start to see the impact of the oil price drop subside gradually. Examining the Gauteng Pump Price year-on-year deflation rate for March, it was still a healthy -21.7% year-on-year down. However, this was less than February’s -26.6%, suggesting that from here on the disinflationary impact of oil prices may gradually start to wear thinner. However, we continue to project low inflation numbers in the near term, and an average CPI inflation rate of 3.9% for 2015 as a whole.

View more here – Consumer Banking Barometer February CPI March 2015