What only a slight dip in US inflation means for SA (interest rates top of mind)

Bruce Whitfield interviews Professor Adrian Saville, Investment Specialist at Genera Capital.

Wallet squeezed by inflation (pixabay.com, 2018)

US inflation is on its way down, but at a much slower rate than had been hoped.

It dipped to 8.3% in April, only a slight drop from the 40-year high of 8.5% in March.

The numbers will define how aggressively the Federal Reserve will raise US interest rates, and these lead the rest of the world.

In March, South Africa's consumer price inflation accelerated to 5,9% from 5,7% in February.

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Bruce Whitfield talks to Professor Adrian Saville (Investment Specialist at Genera Capital) about how US inflation affects the rest of the world, including South Africa.

What really matters is the number ahead the point 3 or the point 5. We're talking about US inflation running at 8%... It's worth reminding ourselves what that inflation environment means for capital markets, asset prices, real estate, and in that mix also interest rates, which have been off the table for a long time.

Prof. Adrian Saville, Investment Specialist - Genera Capital

(commenting on what the trajectory is) The statistical answer... is there's a good chance that inflation goes lower.

Prof. Adrian Saville, Investment Specialist - Genera Capital

Another factor to take into account is what the origins of the inflation rate are, and whether these have dissipated he says.

I'm not sure that the US Fed have yet taken raising interest rates seriously. Two useful economic models (the Taylor and Mankiw rules)... point to an interest rate of 7% or 8% in the US. We are so far away from that...

Prof. Adrian Saville, Investment Specialist - Genera Capital

It is closer to home than you imagine... In particular emerging markets with sophisticated capital markets like South Africa would have to pay very close attention to what the US is doing on interest rates and if anything, would have to lead the US rather than respond to it.

Prof. Adrian Saville, Investment Specialist - Genera Capital

It is uncommon for the US to run higher inflation than South Africa as it is at the moment says Saville.

If South Africa allows allows the gap between the interest rates to get too big, it would result in our currency devaluing, along with a host of related problems like capital outflow.

Pushed for a number, Prof. Saville says forward rate agreements point to a 2% interest rate over two years for South Africa.

Listen to the investment specialist's analysis in the audio below:

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