In September 2011, headline CPI inflation rose by 0.4%m/m, with the annual rate rising to 5.7%y/y. This was above market expectations, which was for an increase of 5.6%y/y (STANLIB 5.6%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 almost certain to rise above 6% in the coming months.
The higher than expected inflation outcome reduces the chances of an interest rate cut before year-end or early next year - rather it increases the chances that the Reserve Bank will simply keep interest rates on-hold well into 2012.
During September 2011 there was a relatively large monthly increase in home rental costs, which added 0.1 of a percentage point to the monthly rise in CPI.
However, the more notable increase during the month was a large 1.1%m/m rise in food inflation, which pushed the annual rate of food inflation up to 8.7%y/y, from 7.3%y/y in August, and added 0.2 percentage points to the monthly rise in CPI. The increase in food inflation was very broad-based with almost every major category of food inflation rising. In particular, sugar, sweets and desert prices jumped 3.9%m/m, fish prices rose 2.3%m/m, vegetables climbed 1.8%m/m, fruit up 1.5%m/m, breads and cereals gained 0.9%m/m, and meat increased 0.7%y/y. Meat inflation, which comprises 32% of the measured food inflation basket, is now up at 12.1%y/y.
While we have been expecting that the upward momentum in domestic food price inflation would plateau, the recent weakness of the Rand could create further food inflation pressure.
CPI excluding food and fuel is still well within the inflation target at 4.3%y/y, recording a monthly rise of 0.3%m/m. Clearly, underlying inflation remains relatively well contained.
Services inflation remained unchanged at 5.4%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 well above 6%y/y, while the inflation rate for pensioners is now up at 6.2%y/y.
Looking ahead, there are still some upside risks to SA inflation. These include mainly administered prices (electricity, water, fuel etc). 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 pressures) as well as the Rand exchange rate. There is little doubt that the relative strength of the Rand in 2010 cushioned SA from some potentially damaging price pressure, but this could change going into 2012.
All of these factors, together with a statistical base effect, suggest that the annual rate of consumer inflation in South Africa is set to move higher in the coming months and will almost certainly breach the upper-end of the inflation target within the next month or two. This upward trend is still mostly as a result of cost push or external (international) factors.
Recent economic developments in the US and Euro-area (especially the increased risk of a recession in the Euro-area) coupled with the recent decision by the Federal Reserve to keep rates on hold until mid-2013 and the pressure on the ECB to cut rates, as well as 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. However, the current upward trend in inflation (and the higher than expected September inflation reading) reduces the chances of a cut in domestic interest rates - unless the SA economy returns to recession conditions, which is not our base case forecast.
Download the presentation slides