Consumer inflation will be in the spotlight this week with economists expecting it to have edged higher for the second consecutive month in July.
Economists forecast that the inflation print will be within the Reserve Bank’s 3%-6% target band for the first time since April.
According to a Bloomberg forecast, consumer inflation, as measured by the consumer price index (CPI), is expected to have increased to 3.1% year on year in July and 1.2% month on month. Stats SA is set to release CPI on Wednesday.
FNB economists said in a note: “Much of this upward price pressure is expected to stem from a more moderate deflationary reading in July fuel prices compared to the same period in 2019.
“Despite our expectations of these base effects lifting the headline reading, demand-pull inflation would likely have remained subdued amid weak income growth, job shedding and a highly uncertain operating environment.”
CPI inched up to 2.2% in June from a near 16-year low of 2.1% in May, which was pulled lower largely by falling fuel prices.
“This will mark a return of inflation back to the [Bank’s] target range after June’s reading slipped below the 3% lower bound,” Monex Europe market analyst Simon Harvey said.
“Growth and inflation data in emerging markets hold more monetary policy implications than in developed markets, with the CPI undershoot arguably prompting the [Bank] to cut rates last time around.”
The Bank has slashed the repo rate by a cumulative 300 basis points in 2020 to 3.5% in an effort to ease the effect of Covid-19 on an economy that is expected to shrink by 7.3% this year, according to the Bank’s forecast.
The central bank’s monetary policy committee said in July that inflation is forecast to average 3.4% in 2020 and 4.3% in 2021 and 2022.
Also expected this week is the producer price index (PPI) for July amid expectations that it will have increased to 1.5% year on year from 0.5% in June, according to a Bloomberg poll.
“Similar to CPI, we anticipate an acceleration in the July reading amid less favourable base effects from fuel prices in the corresponding period in 2019,” FNB economists said.
The Bank’s composite leading business cycle indicator for June is due on Tuesday. The leading indicator gives a projection of SA’s economic growth cycle for the next six to 12 months. It decreased 0.7% in May.
“While we anticipate an improvement in the June print amid the easing of lockdown restrictions, the year-on-year reading would likely have stayed deeply negative as the operating environment remains challenging,” FNB economists said.
On Wednesday finance minister Tito Mboweni is expected to take questions in parliament, including queries about the funding of Covid-19 relief efforts.
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