CPI Update: Deceleration in July CPI inflation to 4.6% y/y aided by lower electricity price hikes, petrol price cuts and slower food price growth

23 Aug 2017

Annabel Bishop

Chief Economist

In July, CPI inflation decelerated for the sixth consecutive month to 4.6% y/y from 5.1% in June, and from a recent peak of 6.7% y/y in December 2016. The outcome was slightly below consensus of 4.7% y/y.

The key influencing factors behind the slower rate of inflation in July were the housing and utilities and transport components.
Housing and utilities inflation moderated to 4.5% y/y in July from a prior 5.7% y/y. Based on a weighting of 24.62% this translated to a lower contribution to the y/y headline CPI of 1.1% versus 1.4% in June.
Housing and utilities inflation was in turn mainly affected by electricity and water tariffs, which are measured in the month of July. Water tariffs rose 11.5% y/y versus 10.1% y/y in July 2016. However, electricity price inflation rose 2.1% y/y, in line with the 2.2% tariff increase the National Energy Regulatory (Nersa) granted Eskom this year, compared to the 9.4% increase in 2016. As such, the contribution from the electricity component to headline CPI was smaller, at 0.1% compared to the 0.3% contribution in 2016.
Transport inflation decelerated to 1.0% y/y in July from 3.3% y/y in June, with the contribution to headline CPI consequently declining to 0.1% from a previous 0.5%. In July, petrol and diesel prices decreased by 68 and 60 cents per litre respectively, yielding a 3.6% y/y contraction in the fuel price component.
Food price inflation moderated to 6.8% y/y in July from 7.0% y/y in the prior two months. Meat price inflation continued to lift, to 14.4% y/y from 13.0% y/y in June, but the effect was partially countered by the ongoing slowdown in grain prices.  
Inflation in some retail segments such as clothing, furniture and appliances continued to moderate or contract in July (see figure 5). This reflects the effects of past rand appreciation, the weak demand environment and likely increased competitive forces. These considerations have also contributed to core inflation subsiding to 4.7% y/y, from the recent peak of 5.9% y/y in December 2016.  
A relatively resilient rand, the alleviation of most of the drought effects and the disinflationary impact of domestic demand conditions should support the moderation in inflation to 5.2% in 2017 from 6.3% y/y in 2016.