Over the month of July, consumer prices increased by 0.3% month-on-month (m/m), resulting in the year-on-year figure dropping sharply to 4.9% year-on-year (y/y) from the 5.5% y/y registered in June. Markets expected CPI inflation to moderate somewhat to 5.2% y/y in July. The latest print confirms the continuation of the downward trend in consumer price inflation evident since January and marks the sixth consecutive month that CPI inflation has surprised on the downside. Core inflation measured 0.5% m/m, resulting in the annual figure moderating slightly to 4.5% y/y.
The largest contributor to the monthly figure was the housing and utilities component, which added 0.6 percentage points (%pts) to the overall monthly increase. The transport component countered much of the increase in housing and utilities by contributing -0.3 %pts over the month. The largest contributors to the annual increase in CPI inflation were the housing and utilities (+1.4 %pts), transport (0.8 %pts), food and non-alcoholic beverages (+0.8 %pts) and miscellaneous goods and services (+0.7 %pts) categories. These categories accounted for 3.7 %pts of the year-on-year figure.
Over the month, inflation in the housing and utilities component measured 2.4% m/m. The strong monthly figure is mainly due to the July survey on municipal rates (such as electricity and water tariffs) conducted during the month. Both the electricity and other fuels, and water and other services components increased by 8.6% m/m, resulting in the year-on-year figures moderating to 9.6% y/y and 9.1% y/y respectively. The fact that the electricity tariff increase granted to Eskom for 2012/13 was adjusted downward from 25% to 16% likely accounted for the lion’s share of the fall in the annual rate of inflation in the category.
Inflation in the transport component fell to 4.6% y/y in July, mainly due to a sharp drop in the price of petrol. The domestic price of petrol decreased by 85c/litre in July on the back of the substantial fall in the international price of oil registered during June. As a result of the drop in prices, the petrol index fell by 7.6% m/m, resulting in the annual figure slowing from 14.2% y/y in June to 8.9% y/y in July. Recent developments, such as the flare up of tension in the Middle East and possible supply disruptions in the North Sea, have once again pushed up international oil prices and suggest that the downward trend in the domestic price of fuel is unlikely to continue in the coming months.
After declining in month-on-month terms for two consecutive months, prices in the food and non-alcoholic beverages (FNAB) component remained flat during July. Falling prices for meat (-0.6% m/m), fruit (-0.4% m/m) and bread and cereals (-0.1% m/m) were countered by increases for fish (+1.4% m/m), sugar, sweets and desserts (+1.3% m/m) and oils and fats (+0.8% m/m). July marked the sixth consecutive month of falling meat prices, while bread and cereals price inflation has also been moderating since peaking in February. As mentioned in previous comments, this trend is likely to reverse towards the end of 2012 and into 2013 on the back of skyrocketing international grains prices due to the severe drought ravaging the United States’ Midwest and supply fears in the wheat rich Black Sea region.
After accelerating somewhat in June, core inflation (headline excluding FNAB, petrol and energy) measured 0.5% m/m during July, resulting in the annual figure moderating slightly to 4.5% y/y. Year-on-year core inflation has been relatively stable since January, fluctuating in a narrow band between 4.3 and 4.6%, and probably contributed to the SA Reserve Bank’s Monetary Policy Committee’s decision to cut the short term interest rate in July.
CPI inflation has been moderating since reaching a peak of 6.3% y/y in January, mainly on the back of falling food and, in recent months, fuel prices. However, recent international developments have resulted in significant upside risks to the inflation outlook going forward. A flare up of tensions between Israel and Iran, as well as the continued civil conflict in Syria, has resulted in Brent crude oil rising sharply to trade above $114. The result is that consumers could expect an increase in the domestic price of petrol in excess of 80c/litre in September following the 55c/litre increase in August. Furthermore, the worst drought to hit the United States (the world’s largest producer of grain) in over 50 years continues to ravage crops and has resulted in skyrocketing international prices. Domestic markets have not been unaffected by recent developments, with domestic wheat and maize prices increasing by 15% m/m and 24% m/m respectively during July. The increasing prices for soft commodities could result in food inflation accelerating substantially towards the end of 2012 and into 2013.
In all, the BER expects headline CPI inflation to remain within target for the remainder of 2012 and to end the year at around 5.2% y/y, after which developments in particularly food prices could see consumer price inflation trending upward throughout 2013. Additionally, given the upside risks to the CPI outlook identified above, today’s better than expected CPI print has not changed the BER’s expectation for an unchanged repo rate through 2013.