The housing rental market is instrumental in containing CPI inflation currently, and thus a contributor to low current interest rates. However, the overall CPI for housing and utilities remains the most troublesome CPI item.
The Consumer Price Index (CPI) for housing and utilities remains the single-most troublesome major CPI sub-index from an overall inflation and interest rate point of view. Of the 4.1% yea-on-year CPI inflation rate in February, this key sub-index contributed 1.3 percentage points, the single largest contributor to CPI inflation.
It is the combination of this CPI sub-index’s large weighting of 24.62% in the overall CPI, the largest weighting in the CPI, and its inflation rate of 5.3%.
However, its upward pressure on overall CPI could have been far worse were it not for a weak rental market.
The weakness prevalent in the residential rental market has kept the CPI inflation rate for actual rentals at a lowly 4.19% in the most recent survey, well down from 5.68% back in September 2017. The CPI for owner equivalent rentals has also slowed from year-on-year inflation of 5.39% as at September 2017 to 3.84% by the early-2019 survey.
This slowing in the two categories of rental inflation has been important to the overall CPI, because the two indices have a large combined weighting of almost 17%.
However, while weak housing market performance is a positive for containing interest rates at present, certain key housing-related cost items are more troublesome for CPI inflation. Here FNB refers to CPIs for the various for municipal rates and utilities tariffs, and electricity isn’t the biggest problem of late. In February, the CPI for “Water and Other Services”, which includes municipal rates as well as non-electricity tariffs such as water, was rising year-on-year by 10.99%. The CPI for electricity and other household fuels was inflating by 7.63% (although probably due to accelerate soon given the NERSA tariff hike announcement in March.
And finally, there is the weak home maintenance and repairs market, its CPI rising by a lowly 2.59%, possibly being “crowded out” by the strong rates and utilities tariff hikes which exert pressure on household finances.