Consumer price inflation came out in line with expectations in August. Consumer prices increased by 0.2% month-on-month (m-o-m), resulting in the year-on-year (y-o-y) figure ticking up by 0.1 percentage points (%pts) to 5.0% y-o-y. Core inflation measured 0.2% m-o-m, resulting in the annual figure picking up marginally to 4.6% y-o-y.
The housing and utilities and transport categories each added 0.1 %pts to the overall monthly figure, while 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 0.2% m-o-m, mainly due to monthly increases in the water and other services as well as electricity and other fuels categories. Year-on-year inflation in the electricity component dropped sharply in July as a result of the implementation of the reduced electricity tariff increase granted to Eskom for 2012/13. In August, annual inflation in the category picked up to 10.0% y-o-y (9.6% in July) on the back of a 0.7% m-o-m increase in prices. Electricity price inflation is expected to remain relatively subdued over the rest of the year, but clarity on future tariff hikes will only be obtained following the imminent announcement by the National Energy Regulator of South Africa (NERSA) regarding price increases granted to Eskom beyond 2013.
Following a 55c/litre increase in the price of petrol in August, inflation in the transport category increased to 4.9% y-o-y (from 4.6% y-o-y) in July. The increase in petrol prices translated into a 2.1% m-o-m increase in the petrol sub-component of the CPI, resulting in the annual figure ticking up to 9.3% y-o-y in August. During June and July, the Rand price of oil was sharply down relative to the first half of the year (see the figure below), which translated into a cumulative fall of R1.40/litre in the domestic price of petrol. However, the recent flare-up of tension in the Middle East, supply disruptions in the North Sea and increased risk appetite following the stimulus measures announced by the US Federal Reserve, European Central Bank and Chinese government, have resulted in the international price of oil trending upwards over the last two months. Coupled with a relatively weak currency, the high oil price translated into an increase of 93c/litre in the domestic price of petrol in September. Should oil prices remain elevated, further petrol price hikes can be expected.
Prices in the food and non-alcoholic beverages (FNAB) component remained flat for the second consecutive month in August. Lower prices for fish (-1.2% m-o-m), vegetables (-1.1% m-o-m) and sugar, sweets and desserts (-1.5% m-o-m) were countered by increasing prices in the milk, eggs and cheese (+0.2% m-o-m), meat (+0.6% m-o-m) and oils and fats (+0.8% m-o-m) categories. Food inflation has been moderating since peaking in December 2011 and the downward trend continued into August – annual inflation in the category slowed to 5.1% y-o-y from 5.3% y-o-y in July. However, the latest CPI print showed that meat prices, one of the main drivers of the slower food price inflation over recent months, increased for the first time since January. Higher grain prices, as well as dwindling supplies, may result in further price increases in the category going forward. Food price inflation is expected to remain subdued in coming months, but surging international commodity prices may result in prices increasing substantially heading into 2013.
Core inflation (headline excluding FNAB, petrol and energy) measured 0.2% m/m during August, resulting in the annual figure ticking up slightly to 4.6% y-o-y from 4.5% y-o-y in July. The measure remains well within the SA Reserve Bank’s target range, but the risk that second round effects from renewed increases in energy and food costs could push core inflation higher heading into 2013 has resurfaced.
Outlook
The BER expects headline CPI inflation to remain within the official target range through 2012, after which rising food and energy prices could see inflation trending upward throughout 2013.
The SA Reserve Bank’s Monetary Policy Committee (MPC) will deliver its latest interest rate decision on Thursday. The MPC faces the difficult task of weighing increasing risks to the inflation outlook against continued concerns relating to economic growth. Risks to the inflation outlook emanate mainly from the international sphere, with surging grain prices, the high price of oil and a weaker domestic currency posing significant upside risks to outlook. However, prospects for weaker economic growth in 2012Q3 on the back of the widespread unrest in the mining sector could provide justification for a further rate cut on Thursday. In all, the upside risks to the inflation outlook, combined with the apparent stabilisation in the global economic environment, are expected to outweigh any domestic growth concerns on the part of committee members. As such, the BER expects the MPC to keep rates at current levels for the time being.