In April 2016, South Africa’s headline CPI inflation increased by a further 0.8%m/m. Despite the relatively large monthly increase, the annual rate of change in consumer prices slowed to 6.2%y/y, down from 6.3%y/y in March 2016 and 7.0%y/y in February 2016. The annual increase in inflation during April was in-line with market expectations (STANLIB 6.2%y/y). Despite the slowdown in the annual rate of inflation, food prices, in particular, rose fairly significantly during the month, while there was also a further jump in fuel prices. In contrast, hotel inflation dropped sharply. Consumer inflation is still expected to move noticeably higher over the coming months, ending 2016 at an estimated 8.0%y/y (see forecast chart attached).
Food prices rose by a very substantial 1.9%m/m in April, pushing the annual rate of food inflation sharply higher to 11.3%y/y, up from 9.8% in March 2016. The increase in food inflation during April included a 6.0%m/m rise in vegetable prices (23.0%y/y), a 5.8%m/m jump in fruit prices (19.6%y/y), a 2.1%m/m increase in sugar, sweets and dessert prices (11.2%y/y) and a 2.1%m/m acceleration in milks, eggs and cheese (5.2%y/y). All indicators suggest that food inflation is going to continue to increase over the coming months, reflecting partly the effect of the weaker Rand, but also the impact of the current drought conditions. We expect food inflation to end 2016 higher at around 14%y/y. (Food has a weight of 14.2% in the inflation basket). This will help to push overall consumer inflation higher to around 8% by end 2016. (see discussion below).
Petrol inflation rose by a substantial 7.5%m/m in April. This reflects the impact of the recent 88c/l increase in the fuel price. Unfortunately, the petrol price rose by a further 12c/l in May and is expected to increase by well over 20c/l in June. This will add to the update pressure on CPI over the coming months.
Other noticeable changes in inflation during April 2016 included a 3.0%m/m decline in hotel inflation. This means that over the past year, hotel inflation has risen by a mere 3.6%y/y, reflecting the general slowdown in domestic business activity, including a moderation in business travel as companies and public corporations focus increasingly on cost cutting.
CPI excluding food and petrol is still within the inflation target at 5.8%y/y, while core inflation (CPI excluding food, fuel and electricity) edged slightly higher to 5.5%y/y in April, but is down from 5.7%y/y in February 2015. This muted pressure on core inflation will help the Reserve Bank to keep interest rates unchanged in the very short-term. It would also suggest that the pass-through from a weaker Rand is not yet hugely problematic. There is still the real risk that inflation expectations rise as core inflation drifts higher and moves above the inflation target in the second half of 2016. Services inflation was recorded unchanged at 5.7%y/y, while administered price inflation fell sharply to 4.5%y/y. The inflation rate for pensioners was recorded above the target at 6.2%y/y.
For 2014 as a whole, SA CPI inflation averaged 6.1%, up slightly from an average of 5.8% in 2013 and 5.7% in 2012. For 2015, SA inflation averaged an impressive 4.6%. However, we are very concerned about a sharp upward trend in SA inflation during the second half of 2016, and expect inflation to average 6.7% for the year as a whole, ending 2016 at around 8.0%. This expected increase in inflation in 2016 is due to a combination of factors, namely unfavourable base effects, a sharp increase in food inflation as a result of drought conditions and weaker exchange rate, higher electricity and water prices, a further increase in excise duties and the fuel levy in the 2016 National Budget, and an increased pass-through impact on inflation of the weaker exchange rate. Our inflation forecast model suggests this risk of higher inflation in 2016 could manifest more noticeably in the second half of 2016.
In 2015, the SA Reserve Bank became concerned about a broadening of inflationary pressure and decided to start to increase interest rates. While this was partly in response to concerns about inflation, it also reflected their worry about South Africa’s vulnerability to foreign capital outflows should the Federal Reserve decide to start to normalise interest rates. They followed this with a further hikes of 75bps in 2016. South Africa’s growth outlook remains troubling and at risk of weakening further, while the markets remain anxious about the political backdrop and the risk that S&P could downgrade SA’s credit rating to below investment grade on 3 June 2016. This will also encourage the Reserve Bank to remain vigilant. However, having already hiked rates by 200bps since the recent low, the Reserve Bank could afford to pause and leave rates unchanged in the very short-term. Nevertheless, given our outlook for SA inflation later in 2016, we think the SA Reserve Bank will continue to increase interest rates later in 2016. At this stage the Repo rate is forecast to end 2016 at 7.50%.
Please follow our regular economic updates on twitter @lingskevin.
Download the presentation slides