• In December, headline CPI inflation moderated from 7.4% to 7.2%. This was below Bloomberg consensus expectations of 7.3%. Core CPI inflation, expected to rise from 5.0% to 5.1%, slowed down to 4.9%. Inflation is now on a clear downward trajectory in 2023, having peaked at 7.8% in July 2022 and averaging 6.9% (4.6% in 2021).
• The main reasons for the better than expected outcome were a stabilisation in food prices (12.7%y/y vs 12.8%y/y) and a decline in rental/owner occupant inflation (2.5% vs 2.8%; 2.8% and 3.2%). Other categories increased in line with our anticipation, i.e. fuel price inflation (+1.7%m/m but 0.1%y/y owing to base effects).
• Today’s inflation print and Monday’s BER inflation survey for 4Q 23 were important inputs for next week’s MPC meeting. ICIB forecasts the MPC to raise the repo rate by 25bps to 7.25%. While we think that there is an off chance for the repo rate to remain unchanged, it may be too rapid a move from 75bp in November to flat. The “votes” will be interesting and could be something like this: 0-1; 25bps-3/4; 50bps 0/1.
• Note that the oil price outlook has changed faster than we anticipated. Herbert mentioned that refining margins on petrol has doubled from $8/bll to $16/bbl which has led to a daily underrecovery on the petrol price of R1.19/cl! This means we could see a petrol price increase of 15/20/cl and an even bigger increase in March if the status quo prevails.
Inflation ended a long way off from initial 2022 predictions of 4.9% to an estimated 6.9%. In 2023, ICIB forecasts an average of 5.6% in 2023, with a year-end rate of 4.9%. Base effects from the acceleration in food and fuel prices in 2022, and a decline in January 2023’s energy prices, will do most of the heavy “pulling” to lower inflation in 2023. Inflation could retreat sharply from more than 7.0% in 4Q 22, 5.5%. 5.5% in 2Q 23, and 4.9% in 2H 23. The drivers of inflation volatility namely food, fuel and electricity, will again be the dominant drivers in 2023
Oil price to rise: The oil price is an important risk to an earlier return of inflation to Central Bank targets. Global recession fears, dominated in the new year and the oil price briefly slipped to 80$/bbl before returning to $85/bbl). Our energy analyst, Herbert Kharivhe, expects a volatile price in 1Q 23 as the markets process China’s reopening and the depth of the expected US recession or economic slowdown. However, thereafter a meaningful pickup is expected from 2Q and 3Q. Herbert forecasts an average oil price of 98$/bbl in CY23 (92$/bbl H1 and 105$/bbl in H2), with the SARB’s average of 92$/bbl. The drivers are:
- US commercial inventories are at 2014/15 levels, despite the largest historical Strategic Petroleum Reserve (SPR) (240 million barrels) released in 2022. Demand is +/- 10 million barrels per day higher relative to 2014/15, and therefore requiring more storage/inventories. The SPR is at levels last seen in the mid-80s.
- Oil is undersupplied (+/- 275 million barrels) in 2023, with prospects of increasing demand from China’s reopening.
- Further supply could decline as a result of the price cap on Russian sea-borne crude oil exports, and the pending ban on refined petroleum products (effective 5-Feb-23).
- We flag the low OPEC spare capacity which consists of Saudi Arabia (+/-1.5 million barrels per day) and UAE (1 million barrels per day).
- US shale can underwhelm in 2023, as companies continue to favour shareholder distributions (dividends and share buybacks), over production growth.
- o The implication for the fuel price in South Africa is an average of 2.5% compared to 34.4%. This reflects a reversal of the sharp decline of more than R2.00/l in January with increases recommencing in March 2023.
Food price inflation to moderate: Food price inflation peaked at an estimated 12.9% in December 2022, averaging 9.5% in 2022 compared to 6.5% in 2021, with grain, protein and oils and fats the key drivers of higher inflation. In 2023, Investec’s food analyst, Anthony Geard forecasts a moderation in food inflation to an average of around 6%. (SARB 6.2%). Food inflation has peaked in 4Q 22. The anticipated moderation in 2023 will be more from base effects as pressure on input costs can still translate into upward monthly adjustments, but on a smaller scale. At the margin, lower freight charges, a stronger rand and a reduction in transport costs reduce pressure (temporarily). But load shedding translates into wastage. The decline in the maize price will reduce pressure on grain inflation, and soft commodities could benefit from good rainfalls. But protein prices such as poultry, could remain under upward pressure.
Electricity tariff increase: Nersa granted Eskom a tariff increase of 18.74% in F23/24 and 12.68% in F24/25. This adds nearly 0.6ppt to July 2023’s CPI inflation rate, depending on the margin added by municipalities. . The SARB pencilled in 10.4%, which implies a lift to their inflation forecast in 2H23, although we see only a small increase in their average inflation forecast of 5.4% for 2023. Higher input costs, however, could contribute to stickier core CPI inflation, forecasted to average 5.5%.
Nominal effective exchange rate: Following a 14% variance in the trade weighted index of the ZAR and 27% in the USDZAR, we expected the ZAR to be on a steadier footing in 2023, owing to the reopening of the China economy, and higher for longer commodity prices. (See analysis below). We forecast the rand to average R16.60/$, with a year-end rate of R16.30/$. The output gap could stay more negative as the growth outlook deteriorates, but potential GDP has declined to 0.5%, according to SARB November 2022 forecast.
What are the risks?
• A steeper rise in the oil price as geopolitical risks remain high.
• A ceasefire in the Russia/Ukraine war could lead to a decline in the oil price.
• Steeper fuel tax increases, i.e. GFIP maintenance as the Gauteng province takes over responsibility.
• An appreciation in the USD if sticky US inflation leads to the Fed raising the terminal rate well above current market pricing of 5.0% and the USDZAR averaging R17.50/$.