SA consumer inflation higher than expected in January 2016, now up at 6.2%y/y. Food inflation at 7%y/y, but inflationary pressures have also broadened

In January 2016, SA headline CPI inflation increased by a substantial 0.8%m/m. This pushed the annual rate of consumer inflation up sharply to 6.2%, from 5.2%y/y in December. The monthly and annual increase in inflation during January was slightly higher than expected (STANLIB 6.0%y/y). Food prices, in particular, rose fairly significantly during the month, but there are also signs that inflationary pressures have broadened (see discussion on core inflation). 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 2.0%m/m in January, pushing the annual rate of food inflation sharply higher to 7.0%y/y, up from 5.8% in December 2015. The increase in food inflation during January included a 5.2%m/m rise in fruit prices, a 4.4%m/m jump in vegetable prices, a 1.6%m/m increase in meat prices and a 1.4%m/m acceleration in cereal prices. All indicators suggest that cereal inflation is going to rise very sharply over the coming months, reflecting partly the impact of the weaker Rand, but largely the impact of the current severe drought. Already cereal inflation at the agricultural level was up at 52%y/y in December 2015 according to Stats SA. Consequently, we expect food inflation to end 2016 sharply higher at around 15%y/y. (Food has a weight of 14.2% in the inflation basket). This will push overall consumer inflation above the inflation target in 2016. (see discussion below).

CPI excluding food and petrol is still within the inflation target, but has moved up to 5.9%y/y in January. Core inflation (CPI excluding food, fuel and electricity) also increased noticeably to 5.6%y/y, up from 5.2%y/y in December 2015. This increase in core inflation will worry the Reserve Bank as it suggests that the weaker Rand is starting to push inflation higher across a broader range of categories. In addition, there is a risk that inflation expectations rise as core inflation drifts higher. Services inflation was recorded higher at 6.0%y/y, while administered price inflation is up at 8.8%y/y as base effects push petrol inflation higher. The inflation rate for pensioners was recorded sharply higher at 6.3%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 2016, and expect inflation to average 6.7% for the year as a whole, ending 2016 at 8.0%. This expected increase in inflation 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 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. They followed this with a further hike of 50bps in 2016. Given our outlook for SA inflation, we think the SA Reserve Bank will continue to increase interest rates in 2016. At this stage the Repo rate is forecast to end 2016 at 7.50%.

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