19 Sep 2017

CPI Update: August CPI inflation lifts to 4.8% y/y from 4.6% y/y on fuel price hikes, but full effect partially countered by slowing food inflation

Annabel Bishop

Chief Economic

CPI inflation lifted in August to 4.8% y/y from 4.6% y/y in July but by slightly less than market expectations of 4.9% y/y.

Figure 1: Contributions of good and petrol to annual CPI inflation
  • CPI inflation lifted in August to 4.8% y/y from 4.6% y/y in July but by slightly less than market expectations of 4.9% y/y. Transport was the key influencing component of the August CPI outcome.
  • Transport inflation rose to 3.9% y/y in August from 1.0% y/y in July. Based on a weighting of 14.28%, this translated to a higher contribution to the y/y headline CPI of 0.6% versus 0.1% in July.
  • The increase in transport inflation was mainly on account of the petrol and diesel price hikes of 19 and 29 c/litre respectively in the month of August 2017. Petrol and diesel inflation rose by respectively 5.7% y/y and 2.8% y/y after contracting by 3.6% y/y and by 6.2% y/y in July.  
  • The fuel price component will continue to exert upward price pressure on CPI inflation in September, in view of the substantial 67c/litre and 44c/litre petrol and diesel price hikes. The Department of Energy is currently estimating a petrol price increase of around 32c/litre in October. 
  • The effect of the fuel price component on headline CPI was partially countered by the continued moderation in food price inflation, to 5.7% y/y in August from 6.8% y/y in July, and from double digit growth in 2016 and Q1.17. Downward pressure on grain prices is being underpinned by the favourable supply outlook. 
  • Specifically, bread and cereals contracted by 1.2% y/y and dairy inflation slowed to 2.8% y/y from a prior 3.3% y/y. In addition, fruit and vegetables registered deflation in July and August. These price dynamics outweighed the effect of persistent meat price inflation of 14.9% y/y in August versus 14.4% y/y in July. According to Agbiz, poultry price increases associated with the avian influenza and cattle restocking are determinants of higher meat inflation.  
  • In August, core inflation eased to 4.6% y/y from 4.7% y/y in July, and from a recent peak of 5.9% y/y, on the lagged effects of past rand appreciation and an absence of material demand led inflationary pressures. 
  • CPI inflation is expected to remain well within target, falling to 4.3% y/y by year end and averaging 5.2% y/y in 2017. Moreover, the SARB sees inflation remaining within the target range over the six to 24 month forecast horizon. As such, the September MPC is expected to deliver a further 25bp interest rate cut to 6.50%, as CPI inflation, and hence inflation expectations, moderate.
Real policy interest rate
Figure 3: Contribution of different groups to the annual change, y/y in the CPI
Figure 4: White and yellow maize prices
Figure 5: Trade weighted rand versus headline CPI inflation