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In this article we take a look at the year on year inflation rates from January 2018 to October 2018 as published by Statistics South Africa (Stats SA) on a curved bar chart. Wondering if South Africa's inflation rate is increasing? And is South Africa's inflation rate increasing so rapidly that the South Africa Reserve Bank has to raise interest rates?
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Inflation increasing but still within the South African Reserve Bank target range
The curved bar chart below shows the annual official inflation rate of South Africa from January 2018 to October 2018 as published by Stats SA. And while inflation has increased slightly from the 4.4% it was at in January, it was sitting at 5.1% for October 2018. So it increased by 70 basis points from 4.4% to 5.1%. It still has 90 basis points to go before it reaches the top of the South African Reserve Bank's target for South Africa's inflation rate. So currently it is still well within the target SARB set for the inflation rate. So why raise interest rates at this point in time when inflation is still well within range and inflationary pressures such as higher crude oil prices and weak exchange rate has been easing substantially over the last couple of weeks?
We do believe the SARB made a mistake by raising interest rates. This move in the monetary policy of South Africa is likely to place South African consumers under substantial pressure in the short term, and with a slow growing economy, an increasing population, high unemployment rate, the short term future of South Africa's economy looks pretty dire. And with slow to no demand, there is no demand pull inflation at play (inflation created by increased consumer demand for goods) as consumers are struggling to make ends meet as it is.
Most of the inflationary pressures are administrative in nature (prices set by government such as fuel, municipal rates, water & electricity) and cost push factors or external factor such as higher crude oil prices in recent months and a weak exchange rate.
So with higher interest rates South African consumers are being punished for inflation not created by them. The idea being higher interest rates will reduce the demand for goods and therefore the price of goods will fall so that retailers can get rid of stock. As prices fall inflation is reduced. This indirect method of combating inflation is very ineffective and takes months to filter through to the economy, by which time external factors could have eased up already (as is the case now with lower crude oil prices and stronger Rand). So we believe SARB compounded South Africa's economic misery by raising rates. The prudent thing would have been to wait this out and see if external factors ease up, as SARB still had 90 basis points to play with before the inflation reached the top of its target. SARB needs to remember the top of the inflation target of 6% still means that inflation is within an acceptable range for the SARB based on their mandate.
The graphic above shows the inflation for South Africa as whole per month. Below we provide a brief summary of the inflation rate of the various provinces for October 2018 are as follows:
Most of the inflationary pressures are administrative in nature (prices set by government such as fuel, municipal rates, water & electricity) and cost push factors or external factor such as higher crude oil prices in recent months and a weak exchange rate.
So with higher interest rates South African consumers are being punished for inflation not created by them. The idea being higher interest rates will reduce the demand for goods and therefore the price of goods will fall so that retailers can get rid of stock. As prices fall inflation is reduced. This indirect method of combating inflation is very ineffective and takes months to filter through to the economy, by which time external factors could have eased up already (as is the case now with lower crude oil prices and stronger Rand). So we believe SARB compounded South Africa's economic misery by raising rates. The prudent thing would have been to wait this out and see if external factors ease up, as SARB still had 90 basis points to play with before the inflation reached the top of its target. SARB needs to remember the top of the inflation target of 6% still means that inflation is within an acceptable range for the SARB based on their mandate.
The graphic above shows the inflation for South Africa as whole per month. Below we provide a brief summary of the inflation rate of the various provinces for October 2018 are as follows:
- Western Cape: 5.4%
- Gauteng: 5.3%
- South Africa: 4.1%
- Mpumalanga: 5%
- Eastern Cape: 4.9%
- Free State: 4.7%
- Northern Cape: 4.5%
- KwaZulu-Natal: 4.4%
- North West: 4.4%
- Limpopo: 4%