In June 2016, South Africa’s headline CPI inflation increased by 0.6%m/m. As a result, the annual rate of change in consumer prices increased to 6.3%y/y, up from 6.1%y/y in May. This was in-line with market expectations (STANLIB 6.1%y/y). Food prices declined in the month, but are up 11% over the past year. In addition, petrol inflation rose sharply in month, as did housing (rental) inflation. Fortunately, the petrol price is expected to drop sharply in August. There was also a large monthly increase in hotel and restaurant inflation.
Food prices fell by 0.1%m/m in June. This is the first monthly decline in food inflation since June 2015. Despite the latest decline, over the past year food prices have risen by a substantial 11.0%. This is up from 10.8%y/y in May. The monthly decline in food inflation during June included a -4.3%m/m drop in vegetable prices (still +18.4%y/y) as well as a -2.6%m/m decline in fruit prices (still +14.0%y/y). These declines were partly offset by a 1.6%m/m rise in dairy products (+8.2%y/y), as well as a 1.6%m/m jump in sugar, sweets and desserts (+12.1%y/y). Although we still expect food inflation to increase a little further over the coming months, reflecting partly the effect of the recent drought conditions, most of the anticipated rise in food prices is now reflected in the data. (Food has a weight of 14.2% in the inflation basket).
Petrol inflation rose by a substantial 4.2%m/m in June. This reflects the impact of the recent 52c/l increase in the fuel price. Although the petrol price rose by a further 11c/l in July, there is currently an average daily over-recovery on the petrol price of 86c/l. This implies that the petrol could fall sharply in August 2016, by around 90c/l. This will help to soften earlier concern about the expected spike in SA consumer inflation during the second half of 2016.
Other noticeable changes in inflation during June 2016 included a 0.8%m/m rise in hotel inflation as well as a 0.9%m/m increase in restaurant inflation. Over the past year, hotel inflation has risen by a mere 3.9%y/y, but could trend higher if the tourism industry continues to improve. This would help to offset some of the current moderation in domestic business travel as companies and public corporations focus increasingly on cost cutting.
CPI excluding food and petrol is still within the inflation target, but only just inside at 5.9%y/y, while core inflation (CPI excluding food, fuel and electricity) edged higher to 5.6%y/y up from 5.5%y/y in May. The Reserve Bank will remain concerned that core inflation is still relatively high and close to the top-end of the inflation. This is a high risk that core inflation breaches the top-end of the inflation target in the second half of 2016, which will negatively impact inflation expectations. Already three provinces have an annual inflation rate of over 7%y/y (see chart below). Services inflation was recorded slightly higher at 5.8%y/y, while administered price inflation was higher at 4.9%y/y. The inflation rate for pensioners was recorded above the target at 6.4%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 still flagging an expected upward trend in SA inflation during the second half of 2016. In 2016 consumer inflation is expected to average 6.6% for the year as a whole, ending 2016 at slightly above 7%. This expected increase in inflation in 2016 is due to a combination of factors, namely unfavourable base effects, the sharp increase in food inflation as a result of drought conditions and weaker exchange rate (already evident in the data), higher electricity and water prices in July/August, and some pass-through impact on inflation of the weaker exchange rate. Our inflation forecast model still suggests this risk of higher inflation in 2016 will manifest more noticeably in the second half of 2016, before dissipating to back inside the target range in 2017.
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 ahead of the local government election on 3 August 2016. This will encourage the Reserve Bank to remain vigilant, but not necessarily hike interest rates. In other words, as we highlighted in each of the past two months, having already hiked rates by 200bps since the recent low, the Reserve Bank could afford to pause and leave rates unchanged in the short-term.
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