Although inflation remained stable in February when compared to January, at 3.2%, the hike in VAT from 15% to 15.5%, as stated in the recent National Budget Speech presented last week by Finance Minister Enoch Godongwana, is set to have long-term implications for the cost of living.
This comes at a time when basic food items are hitting almost two-year highs. Maize meal inflation hit a 17-month high, with samp gaining to a 19-month high last month as the annual rate for food and non-alcoholic beverages hit a four-month peak in February, Statistics South Africa’s print released on Wednesday says.
The price index for maize meal increased by an annual 10.6% and samp by 18.7%, driven by inflationary pressure in the production chain. According to the latest producer price index, annual farm inflation for maize was 64.7% and factory-gate inflation was 15% in January.
Neither maize nor samp attract VAT.
Meat did not increase month-on-month. Cold beverages, milk, dairy and eggs, oils and fats, and sugar, confectionery and desserts witnessed slower price increases, the agency says.
Anchor Capital economist, Casey Sprake, says in response to the CPI print, that “consumers faced renewed pressure” given the increase in food prices such as maize and samp.
Yet, Old Mutual chief economist, Johann Els notes that food inflation was contained.
Overall, Statistics South Africa notes that annual consumer price inflation (CPI) was 3.2% in February, unchanged from January. Yet, it said that this was the “fourth consecutive month that inflation has remained above the four-and-a-half-year low of 2.8% in October”.
Els says inflation was lower than expected, as it was anticipated to reach a gain 3.4%. “That was a good outcome,” he said.
South African Reserve Bank (SARB) governor, Lesetja Kganyago, has indicated several times that he wants the inflation target changed from the 3%-6% range to the medium point of 4.5%. However, this cannot happen without official policy changes.
In the most recent National Budget, National Treasury noted that inflation targeting has been beneficial for the economy, especially the poor. It added that the government continued to support “effective inflation targeting”.
In a recent note, Investec Chief Economist, Annabel Bishop, said that the 0.5bps increase in VAT as proposed, if approved, would result in a 0.25 percentage point increase in CPI.
Sprake adds that government’s recent announcement of a 0.5 percentage point VAT increase could add further upward pressure on prices, which may weigh on consumer spending and household budgets and compound inflationary risks.
However, Els says that the increase in VAT was unlikely to seriously affect consumers in May. Moreover, retailers could well absorb the additional cost in the tax, he states. Two thirds of the basket that makes up Statistics South Africa’s measurement pool attracts VAT, says Els.
Els expects inflation to move lower than 3% in the next few months. This, he explains, will lower the rate at which items in the basket increase in price. He anticipates a 0.25 percentage point rate cut on Thursday, although this will be a close call.
“There is a real possibility of further rate cuts down the line, particularly if we see a more pronounced weakening in the US economy that results in a stronger, more stable, rand,” Els says.
Sprake disagrees, saying that Anchor Capital believes SARB is likely to take a cautious approach, opting to hold the repo rate at 7.50% while closely monitoring external developments and their impact on domestic inflation.
The February CPI is the second to incorporate the changes to the CPI basket and weights announced in January. There are now 391 products in the basket, down from 396.
New food products that were added to the basket include basmati rice, meat bones, meat patties, chicken nuggets and ready-made meals. Items that were removed include ready-mix flour, flavoured milk, frozen potato chips and ground coffee/coffee beans.
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