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Inflation remains stubborn, but below 6%

February’s reading for the consumer price index (CPI) was disappointing, with the pace of retreat since mid-2023 having been halted. The good news is that the CPI remains within the Reserve Bank’s target range for inflation, despite having increased marginally from 5.3% in January to 5.6% in February, which is way below the 7% recorded in February last year.

The focus now shifts to the producer price index (PPI), which is due for publication on 28 March. The latest PPI also saw an upward trend from 4% to 4.7%, but if the February reading remains close to this level, the CPI could well continue its downward trajectory in coming months.

Scrutiny of the February CPI data reveals a mixed bag of news. On the downside, several CPI groups that possess a weighting of above 1% continue to experience stubbornly high year-on-year price increases, including electricity, short-term insurance, personal care, and water, as depicted by the table.

Reasons for insurance knocking on the door of a double-digit increase are not difficult to find. Over the past decade, climate change has hit planet earth with a vengeance and South Africa has not escaped the adverse effects related to flooding (especially in coastal areas) and droughts.

According to Reserve Bank data, the total cost of reinsurance has increased dramatically since 2019 – from an average quarterly amount of just above R10 billion to almost R20 billion in 2023.

No doubt the unrest and looting of shops that occurred in July 2021 also put pressure on non-life insurers. Combined with the poor state of many roads (outside of the Western Cape), these insurers have been faced with dwindling profitability – from an average quarterly net income of R5.8 billion between 2015 and 2020 to less than R700 million in 2020 and a quarterly loss of R2 billion in 2022.

Although their finances returned to positive net incomes last year, the short-term insurance industry has not remotely been able to return to its pre-2021 level of financial stability.

Other exceptionally good news that can be gleaned from analysing the CPI data over the past 18 months is the consistent decline in the price levels for food (including non-alcoholic beverages) and alcoholic beverages.

In combination, these two groups comprise more than 21% of the weighting of the CPI basket and any further downward movement will almost certainly serve to pull back the overall CPI again.

A further moderation of inflationary trends should continue in 2024, which will be good news for indebted consumers and should eventually lead to lower interest rates.

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