19 Jul 2017
CPI Update: June fuel price cuts aid the moderation in CPI inflation to 5.1% y/y from 5.4% y/y previously
In June, CPI inflation moderated to 5.1% y/y from 5.4% y/y in May, in line with market expectations.
The June outcome was mainly influenced by the slower growth in the transport component, of 3.3% y/y versus the 5.2% y/y increase in May. Based on a weighting of 14.28%, this translated to a smaller contribution to headline CPI, of 0.5% in June versus 0.8% in May (see figure 3). In June, petrol and diesel prices fell by 25c/litre and 23c/litre respectively. A further moderation in fuel price inflation is expected in July, with petrol and diesel price cuts of 68c/litre and 60c/litre respectively.
The Brent crude oil price is presently at US$49bbl, having averaged US$52/bbl in H1.17. The lower oil price coupled with rand appreciation in the order of 6% in the year to date has translated to a lower rand-denominated oil price. Looking ahead, the Brent crude futures curve is indicating stable prices over the next three years.
Food price inflation remained steady at 7.0% y/y in June, with the lift in meat price inflation to 13.0% y/y from 12.3% y/y previously, partially offset by the effects of the ongoing slowdown in grain prices. The acceleration in meat price inflation in June can be partially ascribed to low base factors. Going forward, there is scope for more contained beef price inflation with “the beef market is showing some levels of normalisation after the 2015-16 El Nino-induced drought”, according to Agbiz.
Inflation in some retail segments such as clothing, furniture and appliances continued to moderate or contract in June (see figure 5). This reflects the effects of past rand appreciation, the weak demand environment and likely, increased competitive forces. These considerations have also seen core inflation subside to 4.8% y/y from the recent peak of 5.9% y/y in December 2016.
At tomorrow’s MPC meeting the SARB is likely to lower its inflation profile of 5.7% y/y in 2017; 5.3% y/y in 2018 and 5.5% in 2019, as the more recent downside surprises in the CPI outcomes are incorporated.
With the SARB’s focus on the longer-term inflation profile, it is probable that its 18 to 24 month CPI forecasts would need to decrease toward the mid-range of the target range before policy easing is considered.