In November 2015, SA headline CPI inflation increased by only 0.1%m/m. This pushed the annual rate of consumer inflation up marginally to 4.8% from 4.7% in October and 4.6%y/y in September 2015. The monthly and annual increase in inflation during November was exactly in-line with market expectations (STANLIB 0.2%m/m). Food prices, in particular, rose fairly significantly during the month. This was partly offset by decline in the petrol price. Inflation is still expected to move higher over the coming months and breach the upper end of the inflation target in early 2016 and then breach again in the second half of 2016 (see forecast chart attached).
Food prices rose by a more substantial 0.6%m/m in November, although the annual rate of food inflation eased slightly to 4.8%y/y, down from 4.9%y/y in October. The increase in food inflation during November was fairly broad-based including a 4.8%m/m rise in the price of fruit, a 1.5%m/m jump in oil and fats, a 1.4%m/m rise in vegetable prices, and a 1.1%m/m increase in meat prices. Overall, it would appear that food inflation has bottomed on an annual basis, and is forecast to move higher in the months ahead, especially towards the end of 2016. (see discussion below).
Other notable prices changes during the month included a decline in the petrol price. The price of petrol declined by 22c/l in November, which subtracted 0.1 percentage points from the monthly increase in inflation. On an annual basis, petrol inflation was measured at -6.6%y/y, but will move sharply higher in early 2016 largely due to base effects.
CPI excluding food and petrol is still within the inflation target and relatively steady at 5.5%y/y. Core inflation (CPI excluding food, fuel and electricity) eased further to 5.1%y/y, down from 5.2%y/y in October 2015. This will continue to provide the Reserve Bank with some comfort that inflation – at least for the moment - is not becoming entrenched at an ever higher level. Services inflation was recorded slightly higher at 5.7%y/y, while administered price inflation is at only 3.9%y/y, largely as a result of the negative annual petrol inflation rate. The inflation rate for pensioners was recorded at 4.8%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 is forecast to average an impressive 4.6%, but is expected to move slightly higher in final month of the year. However, we are becoming increasingly concerned about an upward trend in SA inflation during 2016, and expect inflation to average 6.0% for the year as a whole. This expected increase in inflation is due to a combination of factors, namely unfavourable base effects (especially in relation to the petrol price), 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.
Earlier this year, the SA Reserve Bank became concerned about a broadening of inflationary pressure and decided to increase interest rates by a further 25bps in November. 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. We think the SA Reserve Bank will continue to increase interest rates in 2016, BUT at a very modest and gradual pace. The Repo rate is forecast to end 2016 at 6.75%.
Download the presentation slides
Please follow our regular economic updates on twitter @lingskevin