Inflation fall leads rate cut speculation

By Staff Writer
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Inflation fall leads rate cut speculation

The have been two measures of inflation released in the last week by Statistics South Africa.

The first one is CPIX or consumer inflation less mortgage costs. The second is the PPI or producer price index.

CPIX measures how much stuff costs for us to buy and PPI measures how much it costs to make that stuff.

Recently the way that CPIX was measured was changed to use a new basket of goods. The way they work it out is to take an 'average shopping basket' of household goods and to measure the price difference from one month to the next, the amount by which prices rise is inflation.

The change to this basket of goods has had a major effect on the inflation rate and inflation now appears to be on a definite downward trajectory.

The figure for CPIX year on year was 10.3% this is the lowest since March of last year when inflation was still in its upward trend.

PPI has fallen as well this time to 11% from 12.6% in November.

In consumer terms a lower inflation rate is a good thing because the price of stuff will rise more slowly. Producers don't like it, because they can't raise their prices as often as they would like to. The answer of the producers is to cut interest rates aggressively with the aim in mind of stimulating spending, fuelling an upswing in the economy.

The news outlets covered both of these sets of data and this is what they had to say.

Business Day came with a headline urging bold cuts to the interest rate. An interviewed economist was of the opinion that the Reserve Bank may front load the expected interest rate cut and come in with a larger cut now in February and then slowly ease in the rest of the expected cuts later on in the year.

There was conjecture that a 100 basis point or one percent cut was possible.

Fin24 looked at the possibilities with the interest rate and extensively quoted the chief economist of Rand Merchant Bank.

He did not believe that the Reserve bank would drop interest rates 'off a cliff' but noted that there would be pressure on them to cut the rates. He was also of the opinion that we are going through an adjustment phase that was caused by too much credit and getting 'greedy'. He reckoned that this would be a painful adjustment but that the excesses of the pre-NCA days needed to be paid for.

BUA News the government info outlet looked at the new data and was calling an interest rate cut of between 50 and 100 basis points.

It looks like the interest rate will come down, but don't get all happy too quickly. These sorts of economic effects can take months to manifest.

Justmoney would rather be socking it away in a savings account and waiting for all the interest rate cuts to happen before buying any hectic big ticket item. The economy is going through a tough patch but will look up again.

The trick is to be prepared to take advantage of it when it does.

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