Trade weighted rand versus headline CPI inflation
  • Following the temporary lift in CPI inflation in August (4.8% y/y) and September (5.1% y/y), primarily on fuel price pressures, the rate moderated to 4.8% y/y in October. The outcome was in line with consensus.
  • In October, the contribution from the fuel price component decreased, as petrol and diesel prices rose by 29 and 42c/litre respectively compared to an increase of 67 and 44c/litre in September. Consequently, annual growth in fuel price inflation moderated to 10.8% y/y in October from a prior 12.2% y/y. A further moderation in the rate of fuel price inflation is expected in November with a smaller increase in petrol and diesel prices of 4 and 23c/litre respectively. However, fuel price pressures are envisaged to intensify again in December, with the Department of Energy currently estimating a petrol price increase of 72c/litre.
  • The rate of food price inflation eased to 5.3% y/y in October, from 5.4% y/y in September and from double digit growth in 2016 and Q1.17. The favourable grain supply situation, and consequent steep decline in grain prices, has contributed to the contraction in bread and cereals of 3.0% y/y and the slowdown in dairy inflation to 2.7% y/y from double digit growth in Q4.16 and Q1.17. Meat price inflation stabilised, albeit at an elevated level, at 15.5% y/y in October after six months of accelerating price inflation. There is scope for meat price inflation to subside on an “expected recovery in the livestock industry”, according to Agbiz.
  • Core inflation eased to 4.5% y/y in October from 4.6% y/y previously, and from a recent peak of 5.9% y/y in December 2016. These muted underlying price pressures are reflective of a persistent absence of material demand led inflationary pressures. In view of the weak economic growth backdrop, depressed consumer confidence, muted rates of household credit extension and an increased tax burden, demand led pressures should remain muted.
  • However, for 2018 and 2019 we forecast CPI inflation to rise to 5.7% y/y and 5.8% y/y respectively from 5.3% y/y in 2017 on a strengthening global cycle, a further lift in commodity prices and higher local administered tariffs.
  • In tomorrow’s MPC statement, the SARB is likely to reiterate that the balance of risk to the inflation profile remains to the upside. The risks include the rand exchange rate, the pace of global monetary policy normalisation and electricity tariffs.
Figure 2: SA Consumer Inflation: history and forecasts
Figure 3: Contribution of different groups to the annual change, y/y in the CPI