In January 2012, headline CPI inflation rose by a relatively large 0.6%m/m, with the annual rate of inflation rising to 6.3%y/y. This was slightly above market expectations, which was for an increase of 6.2%y/y (Bloomberg). During January 2012, food inflation continued to move a little higher, with a broad range of food sub-categories recording relatively large increases.
For 2011 as a whole, SA CPI inflation averaged a respectable 5.0%y/y. This is up from an average of 4.3% in 2010. For 2012 we expect SA inflation to average 6.1%.
Food prices rose by a further 1.5%m/m in January, which added 0.2 of a percentage point to the monthly rise in CPI. Although the monthly increase in food prices was relatively large, the annual rate of change in food inflation eased to 10.7%y/y from 11.6%y/y in December 2011. This was mostly due to base effects. The increase in food inflation during January was extremely broad-based and included relatively large increases in almost every major food category. In particular, meat was up 1.8%m/m, fruit up 4.6%m/m, sugar up 2.2%m/m and fish up 2.6%m/m. We expect that the upward momentum in domestic food price inflation (on an annual basis) will plateau at around current levels, but then ease in the second half of 2012; helped by lower international food prices.
Other large increases in the month include motor vehicles +0.9%m/m, insurance costs +1.4%m/m and financial services +2.8%m/m. These increases are normal for the start of the year.
CPI excluding food and petrol is still within the inflation target at 4.7%y/y, recording a monthly rise of 0.3%m/m, but continues to trend higher. Clearly, underlying inflation has been relatively well contained, but is exhibiting a noticeable upward bias, which will have to be monitored very carefully. Services inflation has also edged higher over the past few months and is now up at 5.9%y/y.
Looking ahead, there are still some upside risks to SA inflation. These include a range of administered prices (electricity, water, fuel – especially the current large daily under-recovery on the petrol price as well as the likely increase in the fuel levy during today’s national budget) as well as Rand weakness. The extent to which these price pressures will impact core/underlying inflation will be heavily influenced by the strength of the domestic economy; which is currently lacking vibrancy, thereby creating less opportunity for companies to pass-on cost increases.
At this stage the inflation rate is unlikely to pose a significant concern for the monetary authorities, albeit in a range between 6% and 7%. The Reserve Bank seems reasonably comfortable in tolerating an inflation rate slightly above the target, especially in an environment where economic activity is subdued and global inflation is projected to moderate during the course of the year. Hence the Reserve Bank can continue to leave interest rates unchanged for an extended period, but has to watch the core inflation rate very carefully given that the headline inflation is already above 6%, and risk are to the upside.
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