21 Aug 2018

CPI update: inflation drops down to 4.0% y/y as expected, driven lower chiefly by moderating food price inflation

Annabel Bishop

Chief Economist

Figure 1: SA Consumer Inflation: history and Forecasts
  • CPI inflation came out at 4.0% y/y for February (January 4.4% y/y), below consensus of 4.2% y/y (Investec forecast 4.0% y/y) as food price inflation fell from 4.6% y/y to 4.0% y/y, while lower petrol prices also assisted, as did lower broad based price pressures from the residual (statistically small items).
  • This is likely the low point of the current CPI inflation cycle, as base effects and tax pressures from the budget kick in from Q2.18. Food price inflation may drop further in March, which would keep CPI inflation around current levels, but looking forward, Agbiz shows rising global demand for maize with rainfall scattered in SA.
  • Specifically Agbiz says “(t)he weather remains a key focus in South African agricultural markets as summer crops are still at critical growing stages which require moisture. The rainfall received in the past few weeks made an improvement in soil moisture.”
  • Additionally, “(e)vidently, the crop is generally in good condition in many areas. But, follow up rainfall is needed given that the crop has been moisture-stressed in the western parts of the country following dryness in the past few days.”
  • In SA food price inflation accounts for a hefty 15.5% of the total CPI and so has a substantial impact on the outcome of targeted inflation.
  • The lower CPI inflation outcome today does not necessarily signal lower interest rates as the SARB bases its interest rate decisions on what CPI inflation is likely to be six to twenty four months in the future, not what it has come out recently at. CPI inflation is likely to average around 5.5% for next year, and over the longer-term and so the SARB is unlikely to cut interest rates on this basis.
  • For CPI inflation to remain around the midpoint of the inflation target range (4.5% y/y) in the longer-term will require subdued (4.5% y/y or less) increases in future state administered tariffs, rates and taxes, which is currently not being uniformly signalled.
  • The SARB aims to achieve CPI inflation of 4.5% y/y over a forward looking six to twenty-four months (but particularly twelve to eighteen months) period in its inflation targeting process.
Figure 2: Contribution of different groups to the monthly change, y/y in the CPI
Figure 3: CPI: Food vs processed and unprocessed price inflation
  • In March a 36c/litre petrol price cut occurred, which will reduce pressure on the targeted measure of inflation in that month. However, little is currently being signaled for petrol price relief in April, which is also the month when multiple tax increases kick in.
  • Specifically, a 1% VAT increase will take place from 1st April 2018, which will add about 0.5% y/y to the CPI inflation rate for the rest of 2018, bringing it up to around 5.0% y/y for the 2018 year as a whole, along with increases for ad valorem tax, fuel levies, alcohol and tobacco, while a sugar tax will be instituted.
  • Coming in from 1st April, these tax increases will impact inflation for twelve months, from Q2.18 to end of Q1.19, and so elevate the CPI outcome.
  • The core inflation rate came out slightly above the headline rate, at 4.1% y/y, the same as in January 2018.
  • A 0.6% m/m increase was recorded from miscellaneous goods and services, the largest component to the m/m outcome, which includes insurance and financial services, among others. It is normal for these premiums to rise annually.
  • There was no clear evidence of any second round, pass through effects from the rand’s appreciation yet on the CPI. The residual was at 0.2% m/m, accounting for inflation pressures too minor to be captured by the categories. On a m/m or y/y basis it fails to demonstrate any clear second round effects of rand strength.
  • We expect CPI inflation to average 4.9% y/y in 2018 for the year as a whole, and 5.3% y/y in 2019.
Figure 4: International food price inflation