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Category: Prices and inflation
Date: 21 August 2019
Date: 21 August 2019
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We take a look at the inflation rate of services, durable, semi-durable and non-durable goods over time and find that services inflation is the most stable even though it tends to higher than that of goods due to the phenomenon of "sticky prices" and that durable and semi durable goods inflation tend to track one another while nondurable goods tend to have the most volatile rates of inflation
Note all data from Statistics South Africa |
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Services and goods inflation in South Africa over time
The line chart below shows the year on year inflation rate of services, durable goods, semi-durable goods and nondurable goods over time up to July 2019. So what is services, durable goods, semi-durable goods and nondurable goods exactly?
- Services in the CPI includes plumbers, financial services, electricians and other services supplied to consumers
- Durable goods: Goods that are bought and is expected to be used over the long term (more than three years). Such goods tend to be appliances, electronics and furniture for example
- Semi-durable goods: Goods expected to last around 3 years. This tends to be clothing and footwear items
- Nondurable goods: Goods usually bought for immediate consumption and use. Food, fuel etc.
As the line chart shows nondurable goods (mostly made up of perishable products such as food or products bought for immediate consumption such as fuel) tends to have the most volatile rates of inflation while the inflation rate of services tend to be the most stable but tends to have higher overall rates of inflation (or does it?). The summary below shows the average rate of inflation of services compared to the various goods types.
So surprisingly (or maybe not) the average rate of inflation for nondurable goods such as food and fuel was higher than the average rate of inflation of services. Durable and semi-durable goods inflation is far lower than that of nondurable goods and services, showing how hard retailers are finding it to offset price increases on goods deemed as relatively more expensive.
- Services: 5.9%
- Durable goods: 1.5%
- Semi-durable goods: 2.9%
- Nondurable goods: 6.6%
So surprisingly (or maybe not) the average rate of inflation for nondurable goods such as food and fuel was higher than the average rate of inflation of services. Durable and semi-durable goods inflation is far lower than that of nondurable goods and services, showing how hard retailers are finding it to offset price increases on goods deemed as relatively more expensive.
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Now the South African Reserve Bank (SARB) and the monetary policy committee (MPC) has been hesitant to lower interest rates largely due to them being scared of second round effects of inflation (inflation being fueled by greater demand which pushes up prices even more) and the fact that inflation tends to be just above the middle of the inflation target range of 3% to 6%.
But with the latest inflation rate coming in at 4% for July 2019, well within the 3% to 6% range and the fact that the inflation rate of durable and semi-durable goods being so low, the SARB MPC can surely not be worried about the fact that inflation might be fueled by consumer demand, as the lack of strong inflation in durable and semi-durable goods shows that there is minimal to no inflation being fueled by consumer demand. If demand was high retailers would easily be able to charge more for durable and semi-durable goods which would translate into higher rates of inflation in durable and semi-durable goods which is absent right now.
With low to no demand pull inflation (inflation driven by consumer demand) there is little to no risk of fueling inflation if a rate cut is provided to struggling South African consumers while this will give the struggling consumers and struggling South African economy a boost without fueling inflation.
We stated in an article a while back that South Africa's interest rates were 225 basis points to high and that South Africa's monetary policy needs to be more expansionary. Since then the SARB MPC has cut South Africa's interest rates by a mere 25 basis points. We believe interest rates needs to come down a lot more in South Africa. and the weak inflation numbers published earlier today supports this view.
But with the latest inflation rate coming in at 4% for July 2019, well within the 3% to 6% range and the fact that the inflation rate of durable and semi-durable goods being so low, the SARB MPC can surely not be worried about the fact that inflation might be fueled by consumer demand, as the lack of strong inflation in durable and semi-durable goods shows that there is minimal to no inflation being fueled by consumer demand. If demand was high retailers would easily be able to charge more for durable and semi-durable goods which would translate into higher rates of inflation in durable and semi-durable goods which is absent right now.
With low to no demand pull inflation (inflation driven by consumer demand) there is little to no risk of fueling inflation if a rate cut is provided to struggling South African consumers while this will give the struggling consumers and struggling South African economy a boost without fueling inflation.
We stated in an article a while back that South Africa's interest rates were 225 basis points to high and that South Africa's monetary policy needs to be more expansionary. Since then the SARB MPC has cut South Africa's interest rates by a mere 25 basis points. We believe interest rates needs to come down a lot more in South Africa. and the weak inflation numbers published earlier today supports this view.