Pensioners smile as inflation drops

There was good news this week for cash flush companies, pensioners and other fixed income investors as Namibia experienced positive real interest rates for the first time in nine months after the annual inflation rate fell to 5.6% in June.
June’s figure marks the fifth consecutive month in which inflation has fallen. The continued fall also means that it is the first time since September 2011 that inflation has fallen back beneath the upper limit of the inflation target of 3 to 6% adopted by central banks in the SACU region.
The drop in inflation was largely driven by food price inflation which decreased for the fourth consecutive month in June to 6.7% from 7.9% in May.
Patrick Britz, Assistant Portfolio Manager at Capricorn Investment Holdings noted that at 29.6%, food and non-alcoholic beverages carry the largest weighting of all the categories in the consumption basket, and as such any reduction in food price inflation will have a significant bearing on easing overall inflationary pressure.
Bread and cereal inflation also saw another big fall in June to 5.7% from 6.7% in May. However, Britz cautions that there are some signs that suggest that this trend might be coming to an end. “This happened after grain prices had a volatile month in June, with adverse weather as the main driver, affecting production in both the United States and the Russian Federation,” he said.
Also contributing to the fall was the annual rate of transport inflation which registered a slight decrease from 8.0% in May to 7.9% in June. Analysts expect further easing of transport inflation in the coming months because of the recently adjusted petrol and diesel prices which came down by 75 cents and 50 cents per litre respectively.
But despite the overall positive feeling on inflation, Britzs cautioned that there could still be other factors that could potentially offset the easing of inflationary pressure.
“One factor being that the Namibia dollar has depreciated by roughly 4% against the US dollar since April. Future exchange rate expectations depend heavily on the views of developments in the Eurozone, as any worsening of the sovereign debt saga could push the rand weaker (as a result of risk aversion) while any improvement could allow the rand to recover.
“A weaker exchange rate could result in inflationary pressure by slightly offsetting the drop in the price of oil, as well as making imports more expensive.”
Furthermore the imminent increase in electricity tariffs cannot be ignored, as it has a 20% weighting in the consumption basket, in addition to having potential secondary effects if businesses transfer these costs to goods and services.