21 Aug 2018

CPI Update: CPI inflation continued to subside at the start of 2018

Annabel Bishop

Chief Economist

Aided by lower fuel price inflation

Figure 1: Petrol and Brent crude oil prices
  • CPI inflation moderated to 4.4% y/y in January from 4.7% y/y in December, on account of a smaller contribution from the transport category, with the contributions from the other categories remaining unchanged (see figure 3).
  • In January, petrol and diesel prices declined by 34 and 22c/litre respectively, with the contribution to headline CPI from the fuel price component decreasing to 0.4% from 0.6% previously. The fuel price decline stemmed from a 5.9% m/m strengthening in the rand that mitigated the effect of an increase in the international Brent crude price to US$63.77/bbl from US$62.50/bbl.
  • The rate of inflation in the remaining components of the transport category (purchase of vehicles, other running costs and public transport) either remained largely steady or also decelerated, resulting in the decrease of the contribution of the transport component to 0.6% from 0.9%.
  • Fuel price pressures dissipated further in February on the 30 and 17c/litre decreases in the petrol and diesel price respectively. The Department of Energy is currently estimating a 34c/litre petrol price reduction in March. Thereafter, the 2018 Budget could introduce renewed upside pressures on the fuel price component if the zero-rating on fuel is removed, without a simultaneous decrease in the fuel levy. Such a measure to expand the VAT base was discussed in the 2017 Budget for implementation in 2018/19.
  • Food price inflation, the other key driver of CPI inflation, continued to moderate in January, to 4.6% y/y from 4.9% y/y previously, and from double digit growth in 2016 and Q1.17. The deceleration in food price inflation has been aided by the decline in maize prices on abundant supplies following a record maize harvest in 2016/17 along with the favourable maize supply outlook for the 2017/18 year.
  • Core inflation slowed to 4.1% y/y in January from a prior 4.2% y/y and from the recent high of 5.9% y/y in December 2016. This is reflective of the lagged effects of rand appreciation and the persistent absence of material demand led inflationary pressures.
  • We project CPI inflation to ease to an average 4.7% y/y in 2018 from 5.3% y/y in 2017, on the assumption that the rand will remain resilient and demand led inflationary pressures contained as only a relatively mild pick-up in economic growth is forecast.
Figure 2: CPI inflation versus nominal trade weighted rand
Figure 3: Contribution of different groups to the annual change, y/y in the CPI