CPI inflation is dead, for now

We have said it over and over and over and over again, that Eskom tariff hikes, the FIFA world cup, fast rising administered prices, higher-than-CPI union wage settlements, are all deflationary in their nature.  CPI inflation will fall to 3%, very likely even to or below 0% in 2010.  This week’s CPI print of +4.2% y/y for June shows CPI disinflationary forces are very strong as it was a weak number across the board, excepting hotel room prices.  The market expected a CPI reading of +4.5% y/y.  Take out the strong hotel price spike of +20%, and you have a number closer to 4.0%. 

We also previously noted that the SARB will cut rates by another 100-200bps before the easing cycle is through.  Talk of raising interest rates is waaaaay premature, there is no way the SARB will tighten if the Treasury is out in the market buying foreign currencies, (which has slipped under analysts’ radars as the government changed its intervention tools) in order to weaken the Rand. 

 Treasury is buying forex to weaken the Rand, and if the SARB were to increase short-term interest rates, it would better the yield differential for foreign investors and likely see the Rand strengthen even further.

If it hadn’t been for the government’s reserve accumulation, the USD-ZAR would most likely be trading comfortably below 7.000 at the moment.  Nevertheless, we still expect the ZAR will scream stronger toward year-end, as sound fundamentals remain in place for ZAR strength.  What will really see the Rand get its groove on will be QE2.

Anyways, the point here is that all eyes should be on money supply growth and credit growth – both public and private – to establish when CPI inflation will pick up.  Without stronger growth than the most recent +0.9% private sector credit growth and +2.4% M3 money supply growth figure for June, at least in the region of 5-10%, CPI inflation is dead.