In October 2011, headline CPI inflation rose by a relatively substantial 0.5%m/m, with the annual rate rising to 6.0%y/y. This was above market expectations, which was for an increase of 5.9%y/y (STANLIB 5.9%y/y).
For 2010 as a whole, SA CPI inflation averaged a very respectable 4.3%y/y, but is clearly trending higher and is expected to rise above 6.5% in the coming months. In addition, inflation could struggle to move convincingly below 6% during most of 2012 – especially if the Rand exchange rate remains around current levels.
During October 2011 there was a relatively large monthly increase in food prices (+2.2%m/m), which added 0.3 of percentage points to the monthly rise in CPI. The large monthly increase pushed the annual rate of food inflation up to 11.0%y/y, which is the highest food inflation reading since May 2009. The increase in food inflation was very broad-based with almost every major food category rising. In particular, vegetable prices jumped 7.5%m/m, while meat prices rose 2.7%m/m. Meat inflation, which comprises 32% of the measured food inflation basket, is now up at 14.6%y/y.
While we have been expecting that the upward momentum in domestic food price inflation would plateau at around 10% to 12%, the recent weakness of the Rand could create further food inflation pressure in the short-term. Fortunately, international food prices have moderated a little in recent months.
CPI excluding food and petrol is still well within the inflation target at 4.2%y/y, recording a monthly rise of 0.2%m/m (if energy prices are also excluded then core inflation is measured at a mere 3.8%y/y). Clearly, underlying inflation remains relatively well contained.
Services inflation edged slightly higher to 5.5%y/y. As we have mentioned over the past few months, it is concerning to see that the inflation rate for lower income earners is now above 7%y/y (which has to be a concern for those companies currently driving the growth in unsecured credit to the lower LSM groups), while the inflation rate for pensioners is up at 6.7%y/y.
Looking ahead, there are still upside risks to SA inflation. These include a range of administered prices (electricity, water, fuel etc) as well as the recent Rand weakness. The latest round of wage agreements could also reflect in a broadening of inflation. 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 slowing, thereby creating less opportunity for companies to pass-on cost increases). There is little doubt that the relative strength of the Rand in 2010 cushioned SA from some potentially damaging price pressure, but this is expected to change going into 2012.
All of these factors suggest that the annual rate of consumer inflation in South Africa is set to move higher in the coming months. We currently expect consumer inflation to breach 6.5%y/y in early 2012 and could start to approach 7%y/y. This upward trend is still mostly as a result of cost push or external (international) factors, but the higher headline reading will tend to worsen inflation expectations.
Recent economic developments in the US and Euro-area (especially the increased risk of a recession in the Euro-area) coupled with the decision by the Fed to keep rates on hold until mid-2013, the pressure on the ECB to cut rates further, and SA’s relatively sluggish domestic economic performance, all suggest that the Reserve Bank will most likely keep interest rates on hold for an extended period; despite the upward trend in inflation.
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