Inflation falls again to 6 point 7 percent

The inflation rate or CPI (consumer price index) is a way of measuring how fast things get more expensive. Inflation was at a high last year and is finally nudging into the Reserve Banks' target band of 3 to 6 percent, falling 0.2%. This is welcome news and might cause consumer sentiment to swing more positive introducing a stimulus to spending. If you know things are not getting as expensive as you thought they were you can plan your budget in light of that. So what were the main factors in the inflation rate change?

• Housing and Utilites increased
• Alcohol and tobacco increased
• Food price inflation decreased

Housing and utilities remain an issue contributing a 3.3% increase to the inflation figure. Petrol is also expected to go up soon due to currency fluctuations. These will factor into the next set of CPI figures, but there effect will be felt over that period that the next set of figures will measure. CPI always trails reality so what the figures say applies to the period over which they were collected. This by definition has already happened so where we are today is not what the figures say, they say where we were yesterday.

CPI figures give an indication of where we have come from so that we can better plan what will come next. Planning your budget allows you to stay on top of any expected changes, if you know that housing and utilities are going up faster than other goods then you can allocate a greater portion of your income to paying your rent or your homeloan. If you are a big spender on petrol then you can expect to pay more at the pump and also plan your budget accordingly. The important thing is to be able to get a sense of what is most likely to cost more next month and be prepared for that.

How much of a pay increase is realistic?

Everything gets more expensive as long as we have inflation. Inflation is a measurement of how much prices are rising by. It is worked out by taking a 'basket' of goods and measuring the price changes in that basket. This gives CPI or the Consumer Price Index, which has been high for a while already. Now if everything is getting more expensive but you still earn the same money then in real terms you have less, hence yearly pay rises. So what would be an appropriate pay rise?

• Inflation peaked at 13.7% August 2008
• Inflation now at 8% in May 2009
• Average inflation June 2008 to May 2009 10.62%

There are strikes going on at the moment demanding increases that not only match the rate of inflation, which will just keep you standing still, but calling for above inflationary increases to increase pay in real terms. This is understandable, after all no-one wants to stay where they are, we all want life to improve and to have more money. Althouh the devil, as always, is in the detail. Statistics SA recently re-weighted the inflation basket leading to a sharp drop in CPI. Statistics SA say that their new weighting is more accurate.

The thing is due to the re-weighting it can lead pay negotiators to believe that inflation is artificially low and thus demand higher increases. The average CPI of 10.62% is a straight average that does not take into account the re-weighting. Basically life got more expensive by at least 10% from June 2008 to May 2009. Just to stay in the same place would require a 10% pay rise, and if you plan a budget this should be apparent. With the economy in recession many employers fear this extra burden and it will lead to further price inflation as new pay scales raise costs. This may be only the beginning of the strike season.

Give us our daily bread

Inflation has been falling this year after soaring causing the policy of inflation targeting via interest rates to cool credit spending and bring our economy into a safer zone. Inflation has been falling which means that stuff should not be getting as expensive as quickly as it was before. Inflation is measured by a basket of goods and some goods are still increasing at rates above headline inflation. Food comes to mind. There is a long period for food costs from planting time until retail many months later, but why are food costs still not coming down?

• Competition issues being investigated
• Bread price fixing cartels fined
• Supermarkets next on the list

Last year while inflation was still running really high farmers were having to pay more to plant and bring their crops to production and this lead to food price inflation being passed on. Even though headline inflation has been falling as a whole, its components have different rates of inflation. Food is such a big part of what we buy that it has a major effect on inflation and without these costs being passed through headline inflation could be even lower than the 8% it is at the moment. The competition commission is investigating the supermarket sector to see if there has been anything dodgy going on.

The competition commission has been flexing its muscles and seems determined to put a stop to the classic South African business culture which is one of jobs for friends and family, and milking it until it is dry. The supermarkets of course deny any wrong doing and even welcome the enquiry. The thing is in a radically altered financial environment like the one we find ourselves inthe old ways of doing things are not going to be able to survive. The National Credit Act was the signal that things were changing and so far it has stood us in good stead, now it is time for the gloves to come off and for our regulatory authorities to ensure that we don't have to live on just bread alone.

What price inflation?

The Reserve Bank's Monetary Policy Committee did not cut interest rates last Thursday the 25th of June 2009. They were widely expected to cut rates beforehand. They have been cutting rates aggressively since December 2008 in order to stimulate the economy. The reason rates were so high was due to the high inflation environment that we were in and the policy of inflation targeting to deal with it. Inflation has not come down quite enough yet and the heavy hand of interest rate manipulation is still weighing in. Interest rates and inflation have a number of implications for your personal finances including:

• Your homeloan
• Your shopping basket
• Your savings account

Homeloans are linked to the Prime rate which is the rate at which the Reserve Bank lends to the commercial banks at plus 3.5%. The Prime rate is generally the benchmark for your homeloan. The 3.5% gap is a convention that the commercial lenders use, but you will often be able to negotiate a Prime minus homeloan. Contact a homeloan specialist to re-negotiate your rate. Even a small rate cut can make a major difference on how much you have to pay. Your shopping basket is massively affected by inflation and food prices are a major cause of inflation. Food production takes a long time and farmers are still paying off last year's high prices this year which leads to higher food prices in the shops right now.

Your savings accounts are affected by the interest rate and as the Reserve Bank cuts rates the commercial banks will pay you less on your savings account. The whole issue of interest rates and inflation targeting is a thorny one and many folk have entered the fray from all sides of the political spectrum. There is a general disappointment at the recent lack of a rate cut, but inflation is also going to be impacted by the Eskom price hike and a slow and steady approach is probably more prudent than feel good quick cuts. Interest rate cuts are not magic bullets and they take a long time to manifest in the economy. The rate cut cycle that started at the end of last year is only really starting to show its effect now. So hang in there, things will get better.

Inflation stays stable at 8.4%

Statistics SA released the Consumer Price Index or the Inflation figures for April 2009 today May 27th 2009. These figures show that inflation has dropped by 0.1% to 8.4%. Average prices increased by 0.5%. This is not totally unexpected and can be seen as the long tail of inflation targeting that has been pursued by the Reserve Bank. Interest rate cuts have an effect on inflation but this effect takes time to manifest and the MPC will be announcing the new interest rates on Thursday 28th of May 2009. GDP is down and this will spur the government to try to kick start the economy. So what has gotten cheaper or not?

• Food and non-alcoholic drinks increased 0.5%
• Bread and cereal decreased by 0.3%
• Petrol increased by 4.9%

The inflation figures when you pick them apart show that the sectors that are getting more expensive most quickly include the petrol price, increasing by 4.9% and hot beverages at 4.7%. These kinds of sectors don't respond as quickly to rate cuts, as there are more inputs to go through before the effect is felt. The Monetary Policy Committee has already cut interest rates by 350 basis points or 3.5% since December 2008 and these cuts are starting to manifest in the economy now, although it seems that with such a small change that the major effects of inflation targeted rate cuts have reached the end of their usefulness.

In order to deal with the economy at the moment using a budget planner is key. Stubborn sectors such as food and transport are still not in parity with the inflation rate and you should budget more for food than before rather than less as you would expect if prices are going up more slowly. These savings are not being passed onto the consumer and we have all got less spending money than previously. So this means we have to be ultra careful with our money if we are to survive the rest of the year before the expected turnaround sets in.

What's in store for the future?

The South African Reserve Bank has released its Monetary Policy Review on the 14th of May 2009. The last review came out in November 2008. GDP contracted at an annualised rate of 1.8% in the final quarter of 2008. This is a result of a number of factors including the global financial problems and inflation. We are still in for a tough time ahead and the markets are not expected to come right too quickly. So what can you do while the turbulence washes over us?

• Batten down the hatches!
• Plan your budget
• Get a savings account

There is now a real possibility that we will enter into recession for the first time in 17 years and the contracting growth we are seeing is expected to last for most of the rest of the year with a turnaround envisaged towards the beginning of 2010 only. Inflation is slowing, partly as a result of the inflation targeting steps taken by the Monetary Policy Committee in cutting interest rates and partly due to the slowing economy damping spending and inflation at the same time. We are not expected to hit the targeted range of 3-6 percent inflation this year although we should come in close to the top end of the target. There are still problems that may occur including a massive hike in Eskom tariffs to fund infrastructure spending.

The report estimates that inflation will hit 6.2 percent by the end of 2009 although this is an estimate with, as with all economics, a heavy dose of Ceteris Paribus, or if nothing else comes along to upset the apple cart. This is a serious flaw in economic thought as projections and estimates always lag behind the reality and reality is in a constant state of flux and it is not really possible to separate factors and treat them as independent when in fact they are highly interlinked and influence each other. So we can expect some light on the horizon but now is the time to expect change and prepare yourself for any shocks that could still occur, plan a budget and stick to it and start putting money aside for just in case.

Are you still going shopping?

New data released by Statistics SA has shown that the retail trade has dropped off in the first three months of 2009 by 2.9 percent in real terms. The drop off comparing March 2009 to March 2008 is a staggering 5.3 percent lower. This means that less folk have got the cash to go shopping. So if you want to be able to still go out to the shops now and again, what should you do?

• Plan a budget
• Compare your credit cards
• Only get what you need

These figures are a bit of a shocker and plainly show that there is just not as much money floating around as this time last year. The numbers show a drop if held to constant prices from 2008, which means that if you take out the effect of inflation then people are buying less than before. These sort of figures suggest that the economy is contracting raising fears of a recession. In conjunction with these numbers manufacturing output was also down indicating that fewer goods are being made, which shows us that even less is expected to be sold in the next few months.

If you put together retail sales and manufacturing output this makes up a sizable portion of our Gross Domestic Product or GDP, somewhere in the region of a third. So we can surmise that a third portion of our economy is already in decline. So if you really do need to spend make sure that your budget is up to date, shop around and compare your credit cards to make sure you are getting the absolute best interest rate and best value card. We can expect the economy to falter further so don't splash out just yet, in fact put some money away and it will come in really handy when the economic outlook starts to improve again.

The inflation targeting debate

The new Minister of Finance, Pravin Gordhan, has signalled his willingness to debate the policy of inflation targeting that has lead our interest rate policy since 2002. The outcome is still uncertain, although analysts believe it will be more on the lines of tweaking current policy rather than a full scale about face. The policy has served us well so far but as the global and domestic financial outlooks change so should our policy. So what did the minister allude to us doing?

• No over borrowing to boost growth
• Spending on infrastructure
• Prudent debt management

Inflation targeting is seen as an investor friendly policy and the market watchers were keenly looking for a reaction in the international bond market to the announcement that Gordhan is open to debate on inflation targeting, but the reaction was minimal meaning that the international markets are so far happy with the new dispensation here in South Africa. The Government is also busy releasing a new bond designed to raise one billion dollars US to help finance our budget deficit. The government knows its budget gap is too wide, but have you planned exactly what is in your own personal budget?

The left has generally been critical of inflation targeting believing it to be more investor rather than worker friendly. However we can expect that any change implemented will be gradualist and evolutionary rather than revolutionary and that the Minister will be looking for a consensus view with regards to any changes in monetary policy. The Government is expected to pursue a more growth oriented strategy and any new policy direction would play to that.

Inflation falling, rate cuts coming

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Inflation falling, rate cuts coming

Inflation has fallen to 7.7%.

This is the lowest it has ever been with the new basket to work it out.

What this means is that there is a new way to calculate inflation. And the new way shows inflation to be much lower than what it was under the old system of calculating inflation.

Stats SA has published a full breakdown of the new basket used to measure inflation.

The outcome is that now that inflation is measured to be significantly lower, the scene has been set for the Reserve Bank to cut interest rates tomorrow (the 5th of February) and finish the policy of inflation targeting.

The financial news outlets have had a look at this story and this is what they have to say.

Business Day said that because the inflation figure under the new method of measurement was so much lower than expected that this would more than likely lead the Monetary Policy committee to not cut rates by a very large percentage.

There has been some speculation that the MPC would cut rates by more than 100 basis points; however this was now unlikely as inflation was dropping faster and the rate would not have to come down as quick to spur spending in the economy.

However they were of the opinion that the MPC would cut the rate by at least one percent or 100 basis points. There is a minority of analysts who believe that the MPC will only go for a 50 basis points cut, but most were plumping for the full percent.

The Dispatch also looked at the drop in inflation and looked at the various components that have influenced its fall under the new weighting regime. These changes were mainly driven by food and petrol costs.

Fin24 called it in their headline 'Cut by 100 basis points'. they are somewhat cynical about the entire re-weighting process and note that in 2006, which was the year the new pattern of spending was derived from even though 2008 is now considered the base year, there could be a skew in it due to the fact that in 2006 there was still a boom going on and 'it was quite conceivable that people were spending more of their pay on buying cars and less on buying food'.

The article finished with a bold call for the MPC to cut rates by a full 100 basis points.

The outcome of the MPC meeting will be known to Trevor Manuel before he gives his budget speech next week and this could have some last minute influences on his thinking.

iAfrica looked at the possibilities for the budget speech.

Justmoney is going to go with the analysts and expect a rate cut to happen. What this means for you is that you maybe able to renegotiate your homeloan, and you may be better able to consolidate your debt into your mortgage. Make a budget and keep to it and as interest rates fall you will end up with more real money in your pocket at the end of the year.

Inflation fall leads rate cut speculation

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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.

How much will inflation fall?

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How much will inflation Fall?

The new inflation data will be released by Statistics SA on Wednesday.

There has been a change to the basket of goods that is used to measure inflation.

The new basket should have the effect of lowering the inflation rate. It has also been redesigned to better separate mortgages out, the list of changes and why can be found on the Statistics SA website.

The Mail and Guardian came in with a speculative piece about how much various economists expected the inflation rate to drop by.

The rate is expected to drop not only because of the changes to the basket used to work it out but also the fact that the upward inflationary spiral that has been a round for some time now, appeared to have turned the trend and to have started heading consistently down, late last year.

The article took a look at the various scenarios that could play out. They based their research on a Reuter's poll that came out last Friday. The poll suggested that of the 19 economists interviewed a consensus on CPIX of 10.4% was reached.

This would be the lowest level that inflation has been at since April 2008.

Some economists saw it dropping further and faster with the possibility of inflation being within the 3%-6% band already by May. It was a policy of inflation targeting that caused all of the interest rate hikes, when inflation was out of that band for so long.

The new headline CPI inflation figure weights food as a lesser portion of the basket now, which should have a major effect as food is a big driver of inflation.

The article then looked at predictions of a rate cut coming and some were even expecting a full 100 basis point cut.

Business Day looked at the rising costs of fruit and veg and how food inflation is soaring. They noted that retail giant Pick n Pay was stepping in and insisting that price cuts be passed on to the consumer.

This sentiment was further followed up in another article by Business Day. The long cycle of interest rate hikes has changed, the markets are suffering and instead of growth in many areas we shall see contraction.

The good news though is that with inflation going down we should see a bit more spending money in our pockets.

It takes time for these effects to be felt in the economy and as in the case of Pick n Pay who understand consumer price sensitivity, they know that the cuts need to be passed down to consumers rather than to a round of profit taking.

However not all retailers will pass on price decreases to your pocket, so until such time as the economy stabilises again, the best thing to do is to hold on tight, keep your budget rolling and set up a savings account as a buffer against anything unexpected happening.