CPI inflation lifted in August to 4.8% y/y from 4.6% y/y in July but by slightly less than market expectations of 4.9% y/y. Transport was the key influencing component of the August CPI outcome.
Transport inflation rose to 3.9% y/y in August from 1.0% y/y in July. Based on a weighting of 14.28%, this translated to a higher contribution to the y/y headline CPI of 0.6% versus 0.1% in July.
The increase in transport inflation was mainly on account of the petrol and diesel price hikes of 19 and 29 c/litre respectively in the month of August 2017. Petrol and diesel inflation rose by respectively 5.7% y/y and 2.8% y/y after contracting by 3.6% y/y and by 6.2% y/y in July.
The fuel price component will continue to exert upward price pressure on CPI inflation in September, in view of the substantial 67c/litre and 44c/litre petrol and diesel price hikes. The Department of Energy is currently estimating a petrol price increase of around 32c/litre in October.
The effect of the fuel price component on headline CPI was partially countered by the continued moderation in food price inflation, to 5.7% y/y in August from 6.8% y/y in July, and from double digit growth in 2016 and Q1.17. Downward pressure on grain prices is being underpinned by the favourable supply outlook.
Specifically, bread and cereals contracted by 1.2% y/y and dairy inflation slowed to 2.8% y/y from a prior 3.3% y/y. In addition, fruit and vegetables registered deflation in July and August. These price dynamics outweighed the effect of persistent meat price inflation of 14.9% y/y in August versus 14.4% y/y in July. According to Agbiz, poultry price increases associated with the avian influenza and cattle restocking are determinants of higher meat inflation.
In August, core inflation eased to 4.6% y/y from 4.7% y/y in July, and from a recent peak of 5.9% y/y, on the lagged effects of past rand appreciation and an absence of material demand led inflationary pressures.
CPI inflation is expected to remain well within target, falling to 4.3% y/y by year end and averaging 5.2% y/y in 2017. Moreover, the SARB sees inflation remaining within the target range over the six to 24 month forecast horizon. As such, the September MPC is expected to deliver a further 25bp interest rate cut to 6.50%, as CPI inflation, and hence inflation expectations, moderate.
The opinions and views expressed are for information purposes only and are subject to change without notice. They should not be viewed as independent research, recommendations or investment advice of any nature.