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Lower CPI the key to drop in Bank rate
THE ECONOMY
STATISTICS can be deceiving. News this week that SA's official inflation dropped to its lowest level in 24 years last year was met with incredulity by consumers. Yet the composition of the Consumer Price Index (CPI), which determines the inflation rate, is as accurate a measure as you can get of the cost of living facing the average SA family. The Central Statistical Service says inflation fell 1,3 percentage points last year to 7,4%, its lowest level since 1972 when the rate was 6,1%. The average CPI, which determines the inflation rate, was 8,7% in 1995 and 9% in 1994. Average food inflation was also at a record low, falling to 6,1% from 8,7% in 1995. The 1996 figures coincided with the release of December inflation figures, widely expected to push inflation closer to 10%. At 9,4%, the rate was lower than widely expected and a mere 0,2 percentage points up on November's figure. Many economists had forecast that last year's 25% plunge in the rand against the US dollar would push inflation to about 9,7% in November. However, despite the positive average figures, the weaker rand did have a marked effect on the price of goods, lifting the year-on-year CPI from 5,5% in April to 9,4%, the highest since June 1995. The monthly increase was a relatively strong 1%. Economists expect the average inflation rate to rise to about 8,5% this year, hitting a peak of just under 10% in mid-year before falling to about 8% by year-end. The impetus for a lower inflation rate will come from a slowdown in consumer spending as well as a steadier rand. The expected drop in inflation bodes well for a cut in interest rates, with the first drop in the Bank rate expected after April and a second one in the second half of the year. Calls for a drop in interest rates were given further impetus this week with money supply figures showing a sharp fall during December. The rate of increase in the broad money supply measure, M3, declined from 15,18% in November to 13,73% while credit extension to the private sector fell from 17,13% to 15,75%.
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