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Increases in Consumer Price Inflation now more broad-based

Supply shortages are causing broad based increases in world consumer price inflation (CPI), preventing it to slow at a faster pace. Nevertheless, as signs of slower world economic growth emerge, central banks may reduce the size of interest rate increases. Russia’s “economic strategy” is causing a “divide” in Europe, contributing to increased economic vulnerability in several countries. South Africa is due to register a smaller fiscal deficit in 2022/23, keeping rating agencies at bay, for now.

Examples of CPI remaining high, slowing at a snail’s pace and being broad-based can be found in the USA, Eurozone and UK’s September CPI and core CPI numbers. In the USA CPI was up 8.2% from a year earlier (y/y), slightly down from 8.3% in August. Excluding food and energy prices (core CPI) it was up 6.6% y/y. CPI in the Eurozone was 9.9% y/y, a record high. Core CPI was 4.8% y/y. The UK CPI remained at 10.1% y/y (a 40-year high), while core CPI was 6.5%. The energy price surge in especially the Eurozone is mostly related to the “Russian-engineered” shortage of natural gas. However, the problem is aggravated by insufficient “harbour infrastructure” as ships full of gas inventory are floating around harbours, waiting to off-load gas. These supply delays contribute to shortages and higher prices. Meanwhile the semi-conductor shortages persist, keeping car price increases high, while major airplane manufacturers are behind production targets, and in conjunction with a shortage in skilled pilots, contributed to airline ticket prices increasing 43% y/y in the USA. For CPI to react faster to interest rate increases, actions are needed to unclog these type of supply disruptions.

Nevertheless, signs are emerging that central banks may soon start to reduce the size of interest rate increases following fears of an economic recession. Although the European Central Bank (ECB) raised interest rates by another 75 basis points in October, the December increase could be 50 basis points, and the terminal rate may be 2.5% early next year. The Federal Reserve may continue increasing rates by 75 basis points though. But, with economic growth seen to slow markedly, the Fed may start considering rate increases of 50 basis points. Economic growth of 2.6% in Q3 2022 (quarterly annualised growth) is estimated to be followed by 0.7% in Q4 2022, while contractions early in 2023 is forecasted.

The aggressive rate increases in the USA thus far were not welcomed elsewhere as it contributed to a surging US$, contributing to sharp depreciations in other currencies, forcing them to also raise interest rates to prevent higher imported (especially energy) CPI, causing a higher risk of economic recessions and governments scrambling to soften the CPI blow with energy subsidies. However, Germany’s energy subsidy policies are creating division in Europe, precisely what Russia wanted through its “energy weaponizing” strategy. By borrowing another €200 billion Germany will spend way more on subsidies than any country, contributing to lower CPI - and being regarded as creditworthy, its borrowing costs will be low. However, less creditworthy countries will now be forced to provide energy subsidies, but their larger fiscal deficits will be financed by higher borrowing costs, creating higher interest rate differentials, making the ECB’s rate decisions difficult.

Likewise, South Africa’s exchange rate depreciated against the US$, while CPI is also not slowing very fast despite large reductions in fuel prices. CPI slowed to 7.5% y/y in September from 7.6% in August, but core CPI increased from 4.4% to 4.7%, also pointing to broad-based CPI taking hold. The Reserve Bank may continue with aggressive rate increases. Meanwhile, the minister of finance indicated a large windfall revenue overrun should cause a fiscal deficit of 4.9% of GDP compared to February’s expected 6% of GDP. Eskom will see a large chunk of its debt taken over by the government in 2023, while the R350 Social Relief of Distress grant will continue next year.

Multivest Economic Division

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