23 Jan 2018

CPI Update: CPI inflation slowed to 5.3% y/y in 2017 from 6.4% y/y in 2016 as supply side price pressures dissipated

Annabel Bishop

Chief Economist

Figure 1: Contributions of good and petrol to annual CPI inflation
  • CPI inflation lifted to 4.7% y/y in December from 4.6% y/y in November, mainly on account of increased upside price pressures stemming from the fuel component.
  • In December, petrol and diesel prices rose by 71 and 60c/litre respectively, on the combination of a higher international oil price and a weaker rand. The contribution to headline CPI from the fuel price component increased to 0.6% in December from 0.4% previously.
  • In addition to the higher fuel price increase, the rate of inflation in the remaining components of the transport category (purchase of vehicles, other running costs and public transport) all lifted, resulting in an increase in the contribution of the transport component to 0.9% from 0.6% (see figure 3).
  • In 2017, CPI inflation averaged 5.3% y/y. This was a moderation from 6.4% y/y in 2016, driven by the dissipation of supply side pressures.
  • These included slower food price inflation that averaged 7.0% y/y in 2017 versus 10.8% y/y in 2016. This was a function of a record maize harvest in 2016/17 along with ample national supplies and a favourable maize supply outlook for the 2017/18 year have supported the decline in maize prices (see figure 4).
  • The lagged disinflationary impacts of rand appreciation in 2016 coupled with an absence of material demand led inflationary pressures were most visible in core inflation that subsided to an average of 4.7%y/y in 2017 from 5.6% y/y in 2016 (see figure 2).
  • The 2017 CPI inflation outcome was also influenced by the smaller 2.2% electricity tariff increase compared to the 9.4% increase in 2016 (see figure 5).
  • We expect CPI inflation to moderate further in 2018 and average 4.8% y/y, on expectations that the rand will remain resilient and demand led inflationary pressures muted, as only a relatively mild pick-up in economic growth is forecast.
  • The SARB’s current inflation forecast is closer to 5.5% over the six to 24 month forecast horizon, which constrains the room to cut interest rates. However, should the rand strengthen notably further on a sustained basis, the SARB may consider an interest rate cut on expected lower inflation.
Figure 2: CPI inflation versus nominal trade weighted rand
Figure 3: Contribution of different groups to the annual change, y/y in the CPI
Figure 4: White and yellow maize prices
2 Kamilla Kaplan • Investec Bank Limited • Tel (2711) 286 7747 • email: kamilla.kaplan@investec.co.za • http://www.investec.co.za/research-and-insights/economy/economic-research-v1.html • CPI Update: CPI inflation slowed to 5.3% y/y in 2017 from 6.4% y/y in 2016 as supply side price pressures dissipated 24th January 2018 Figure 3: Contribution of different groups to the annual change, y/y in the CPI November 2017 December 2017 Food and non-alcoholic beverages 0.9 0.8 Alcoholic beverages and tobacco 0.3 0.3 Clothing and footwear 0.1 0.1 Housing and utilities 1.2 1.1 Household contents and services 0.1 0.1 Health 0.1 0.1 Transport 0.6 0.9 Recreation and culture 0.1 0.0 Education 0.2 0.2 Restaurants and hotels 0.1 0.1 Miscellaneous goods and services 1.1 1.1 Residual -0.2 -0.1 All items 4.6 4.7 Source: Stats SA Figure 4: White and yellow maize prices Source: Grain SA Figure 5: Eskom’s average tariff adjustment