By: Reza Hendrickse, Portfolio Manager at PPS Investments.
Consumer Price Inflation (CPI) slowed to 3.0% year-on-year in April 2020, its lowest point in over a decade. This was a marked deceleration from the 4.1% March year-on-year increase, and a continuation of the disinflationary trend of recent years. The environment for CPI data collection in April was challenged by the COVID-19 lockdown. This resulted in a smaller sample size being used, as well as the utilisation of online goods pricing where possible, and some index adjustments where products were not available for sale.
Similar to the prior month, the main contributors to CPI this period were food and non-alcoholic beverages (0.7% contribution), housing and utilities (1.1% contribution), and miscellaneous goods and services (1.0% contribution), all of which added to higher inflation. Transport however saw a month-on-month decline, swinging to a negative 0.5% contribution in April from a positive 0.5% previously. Transport was the biggest driver behind the 1.1% drop in CPI from 4.1% in March to 3.0% in April, which speaks to the reduction in travel from the Government’s self-imposed lock-down restrictions which limited travel.
The South African Reserve Bank lowered the repo rate by 100 basis points in April and a further 25 basis points in May, offering pre-emptive support to the vulnerable SA economy in the face of the looming economic shock. This brings the cumulative interest rate reduction to 2.75% since the start of the year, which has been appropriate given the drastic change in our economic outlook. The current environment is unique in that we’re seeing both a supply and demand shock, both locally and globally, with the medium-term net effect most likely leading to inflation remaining subdued for now. As a result, there is probably still scope for the SARB to provide further accommodation.