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Inflation on its way down

Consumers would have been delighted by this week’s announcement of lower consumer inflation. The May reading of the consumer price index (CPI) came in at 6.3%, which is almost 20% lower than the peak of 7.8% recorded in July last year. Importantly, the drop of 50 basis points from the April reading was more than the consensus amongst analysts of a 20 basis points drop.

One of the key reasons for the consistent decline in the CPI is the sharp downward trajectory of the country’s producer price index (PPI). The April reading of the PPI is good news for indebted households and businesses, having dropped from a multi-year high of 18% in July 2022 to 8.6% in April 2023 – representing a decline of 52%.

The PPI is a leading indicator for consumer prices and it is clear that the downward trend in producer prices has also started to filter through to the CPI, which is the overall benchmark for inflation.

A further decline in the PPI is anticipated in May, which may spell the end of the 18-month long rate hiking cycle of the Reserve Bank, bringing welcome relief in the area of debt servicing costs.

Unfortunately, food prices remain stubbornly high, in line with a global trend that is related to lingering supply-side constraints imposed by the Covid pandemic, erratic and unpredictable weather, and Russia’s military invasion of Ukraine, which is now in its 16th month. These two countries are important suppliers of grain and concerns over the security of supply has served to raise demand beyond normalised levels.

When analysing the annualised price changes for key consumer groups, it is nevertheless clear that the downward pressure on the CPI is likely to continue. In the event of food prices stabilising and eventually declining even modestly, this downward trajectory could gain considerable momentum before year-end. With electricity rationing having eased since the start of winter, the higher costs associated with alternative sources of energy will also start easing.

The table provides much cheer for prospects of a further lowering of inflation, as a number of key consumer expenditure groups have managed to contain their annualised price increases to well below the Reserve Bank’s upper range for the CPI of 6%. With some luck, hawkish monetary policy may have run its course and interest rates could be on their way down soon.

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