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- The June Consumer Price Inflation figures, due on Wednesday, are expected to lift slightly from May's 15-year low of 2.1%.
- Should deflation ensue – where prices become negative – there would be dire consequences for economic growth, employment prospects, and debt.
- Administered prices such as electricity and water tariffs, however, are expected to exert inflationary pressure, counteracting the risk of deflation.
- Getting South Africans to spend more would require reopening the parts of the economy which are still closed, possibly lifting the ban on alcohol and cigarette sales too.
June's consumer inflation figure, due for release on Wednesday morning, will be a key number for the Reserve Bank to watch ahead of its next forecast.
Last week the central bank's Monetary Policy Committee (MPC) cut interest rates by 25 basis points, believing inflation to be contained for the medium term.
The bank has, so far, cut interest rates by 300 basis points, bringing the repo to 3.5%.
But while at the MPC meeting, Reserve Bank Governor Lesetja Kganyago said negative pricing was not yet a base case for the bank, some economists have warned that SA could be slipping into a "deflationary danger zone" that, if not resolved, reflects potentially dire consequences for economic growth, unemployment and debt.
June's figure will be important from a financial markets and policymaker's perspective, noted Hugo Pienaar, chief economist of the Bureau for Economic Research (BER). June's consumer basket will include a quarterly survey of the heavily weighted rental component. Rentals may have come down a lot in recent months, said Pienaar. Lower rental could counteract the R1.18/l increase in petrol implemented at the start of the month, he explained.
Inflation could come out quite benign: FNB expects a print of 2.2% and Investec one of 2.3%, while the BER expects it to be lower at 1.9%.
Pienaar does not believe there is, yet, a deflation risk, though we are currently experiencing disinflation – a slowing increase in prices – partly as a result of the lockdown. Administered prices such as electricity and water tariffs, rates and taxes are still exerting inflationary pressure. Other items in the consumer basket, such as food, are not in negative territory yet either.
However, disinflation reflects subdued demand from consumers.
"Businesses are not able to pass on through cost increases," he said.
Getting consumers to spend more would require reopening the parts of the economy which are still closed, Pienaar explained:
"This is a contentious issue. There is little doubt that if you open up alcohol sales, people will buy it, the same with cigarettes."
While restaurants might be able to operate, the conditions are still restrictive in terms of the 21:00 curfew or the ban on alcohol sales which impact the feasibility of operating, he added.
Subdued demand is also a reflection of consumers' ability to spend and willingness to spend. Some consumers have suffered income losses, due to being furloughed, some have been retrenched and others have taken salary cuts – impacting their availability of disposable income. As a result, consumers have cut back on discretionary spending on items such as vehicles and furniture. An improvement in consumer confidence – which is currently at low levels last seen in 1985 at the height of apartheid – could possibly result in an upturn in spending. Momentum Investments economist Sanisha Packirisamy is of a similar view, noting that "reinvigorating downtrodden confidence" in consumers – both households and corporates – is necessary to ramp up spending. "Seeing an improvement in regulatory clarity, lower policy uncertainty and greater strides in the implementation of structural reforms could do the trick," she said.Packirisamy also believes that SA has a higher chance of experiencing inflation than deflation, mainly because of reduced economic efficiencies driving cost pressures higher. Mismanagement at state-owned enterprises has also driven up the cost of key inputs, she added. Low competition in product markets and high public sector remuneration are also factors to consider.University of Western Cape Professor of economics Matthew Ocran said disinflation is being experienced by countries across the globe as a result of reduced demand and supply during lockdowns."Nothing is really happening and because of that, demand is weak. If demand is weak it reflects in prices," said Ocran.Although Ocran does not think SA is heading toward deflationary territory, he noted that if we ever did get to that point it would impact economic growth and investment in the future. "If we get into a deflationary kind of environment, it means the cost of debt will be high … the case for investment is minimised."Given a very weak economy like ours, where we want investment to push up growth and create jobs, if we create a situation where real interest rates is not attractive - the incentive to invest becomes very much compromised. That is the risk," he said."It could make monetary policy decisions very difficult," he added. If the repo tool becomes ineffective, then we will essentially be "paralysed".
