21 Jun 2017
CPI Update: CPI inflation lifted slightly in May on food and petrol prices but the broader disinflation profile remains a feature
CPI inflation lifted slightly to 5.4% y/y in May from 5.3% y/y in April, in line with market expectations.
Influencing the May CPI outcome was the higher contribution from the transport component, of 0.8% compared to 0.7% in April, on the petrol and diesel price hikes of 49c/litre and 30c/litre respectively (see figure 3).
Petrol price pressures are however expected to abate in the coming months in view of the 25c/litre and 23c/litre petrol and diesel price cuts in June. For July, the Department of Energy is currently estimating a substantial decrease in the petrol price of 65c/litre.
Food price inflation rose to 7.0% y/y in May from 6.6% y/y in April, with the contribution of the food price component to headline CPI increasing to 1.1% in May from 1.0% previously. The main driver of this lift was meat price inflation that rose to 12.3% y/y from 10.6% y/y in April. However, according to Agbiz, normalising beef supply and improving poultry supply signal that meat price inflation will be contained going forward.
The broader moderating trend in retail food prices at the consumer level is still expected to remain a feature this year, on easing food price inflation along the supply chain (see figure 4). Specifically, manufactured food price growth receded to 6.4% y/y in April from a prior 6.9% y/y and from 13.4% y/y in August 2016. Food price inflation at the agriculture level contracted for the fourth consecutive month in April.
Food price dynamics are reflective of the 67% and 54% declines in white and yellow maize prices respectively from January 2016 peaks (see figure 5). Official estimates by the Crop Estimates Committee place this year’s maize harvest at its largest on record.
The measure of underlying (core) inflation, CPI excluding food and non-alcoholic beverages, fuel and energy prices, remained steady at 4.8% y/y in May but has subsided from the recent peak of 5.9% y/y in December 2016. There is scope for a further moderation in core CPI inflation on the lagged downward effects of past rand appreciation and weak demand led price cost pressures.
With the SARB’s focus on the longer-term inflation profile, it is probable that its six to 24 month CPI forecasts would need to decrease toward the mid-range of the target range before policy easing is considered. Presently the SARB projects CPI inflation at the upper end of the target range at 5.7% in 2017, 5.3% in 2018 and 5.5% 2019.