CPI Update: CPI inflation lifts in September on fuel price pressures but is expected to moderate into year end

17 Oct 2017

Annabel Bishop

Chief Economist

CPI inflation rose for the second consecutive month to 5.1% y/y in September from 4.8% y/y in August and from 4.6% y/y in July. The outcome was slightly higher than the consensus estimate of 5.0% y/y.

Contributions of good and petrol to annual CPI inflation
  • CPI inflation rose for the second consecutive month to 5.1% y/y in September from 4.8% y/y in August and from 4.6% y/y in July. The outcome was slightly higher than the consensus estimate of 5.0% y/y. 
  • The lift in CPI inflation in both August and September was mainly on account of the transport component. Transport inflation rose to 5.6% y/y in September from 3.9% y/y in August. Based on a weighting of 14.28%, this translated to a higher contribution to the y/y headline CPI of 0.8% versus 0.6% in August.
  • The increase in transport inflation stemmed from the petrol and diesel price hikes of 67 and 44 c/litre respectively in the month of September. Petrol and diesel inflation rose by respectively 12.7% y/y and 11.6% y/y from 5.7% y/y and 2.8% y/y in August.  These upward fuel price pressures should abate in October with the Department of Energy currently estimating a petrol price increase of only 1.4c/litre. 
  • The effect of the fuel price component on headline CPI was partially countered by the continued moderation in food price inflation, to 5.4% y/y in September from 5.7% y/y in August, and from double digit growth in 2016 and Q1.17. 
  • The favourable grain supply situation, and consequent steep decline in grain prices, has contributed to the contraction in bread and cereals of 2.8% y/y and the slowdown in dairy inflation to 2.8% y/y from double digit growth in Q4.16 and Q1.17. In addition, fruit and vegetable price deflation has occurred since July. 
  • These price dynamics have outweighed the effect of persistent meat price inflation of 15.6% y/y in September versus a prior 14.9% y/y. Avian influenza and base factors have influenced meat price inflation.  
  • In September, core inflation remained steady at 4.6% y/y, having receded from a recent peak of 5.9% y/y in December 2016, on the lagged effects of past rand appreciation and an absence of material demand led inflationary pressures. 
  • Following the temporary lift in CPI inflation in August and September, on fuel price pressures, its downwards trend should resume into year end. Although the SARB’s forecasts show inflation remaining in the target band over the forecast horizon, interest rates were left unchanged at the last MPC on upside risks. However, should CPI inflation continue moderating, the possibility for a further reduction in interest rates remains as the real interest rate would rise well above the neutral level, which the SARB suggests is around 1.5%.
Figure 2: Real policy interest rate
Figure 3: Contribution of different groups to the annual change, y/y in the CPI
Figure 4: Trade weighted rand versus headline CPI inflation