THE HEADLINE NUMBERS
The June CPI (Consumer Price Index) inflation rate accelerated slightly from 6.1% year-on-year in the previous month to 6.25% in June 2016. This is a mild rise, and keeps the inflation rate slightly above the SARB’s (Reserve Bank) upper inflation target limit of 6%.
The key contributors to the year-on-year inflation rate were Food and Non-Alcoholic Beverages (1.7 of a percentage point, up from 1.6 previous), Housing and Utilities (1.6 of a percentage point unchanged), “Miscellaneous Goods and Services (1.1 of a percentage point), and Transport (0.5 of a percentage point unchanged)
Food, therefore, was both the largest contributor to the year-on-year inflation rate as well as being the single-most important contributor to the small acceleration of this rate from May. The CPI inflation for Food and Non-Alcoholic Beverages is driven by the pass through of drought-induced food price increases, and remains in double-digit territory at 10.84% year-on-year, up from May’s 10.5%. Food and Non-Alcoholic Beverage inflation took over from Education a few months ago as the major CPI sub-index with the highest inflation rate.
South Africa has been fortunate, though, that the Transport Cost inflation decline a few months ago, from a peak of 8.7% year-on-year in February (with the petrol price having previously been driven up by that sharp rand depreciation late last year), and as at June measured a modest 3.3%.
The improved performance of the Rand in recent times has thus been key to reducing the risk of further interest rate hiking since March.
Looking forward, FNB expects the inflation rate to remain not too far above the SARB’s 6% upper inflation target limit over much of the remainder of 2016, to average 6.6% for the year as a whole. While the Rand has behaved as of late, it is possible that less year-on-year decline in key commodity prices, notably oil, later in the year due to low base effects setting in, may exert some mild upward pressure on CPI inflation in the 2nd half of the year. Much depends on the Rand’s behavior, however. Offsetting such upward pressure could be a moderation in food price inflation as drought conditions pass on, however, so any renewed rise is expected to be modest.
IMPLICATIONS FOR INTEREST RATES
FNB is not expecting the latest CPI number to influence the MPC to raise interest rates this week. However, the above mentioned impact of lower commodity price base effects exerting mild upward pressure on CPI inflation later in the year leads us to expect one further 25 basis point Repo Rate hike late in 2016.
Thereafter, moving into 2017 we expect a lengthy sideways movement in interest rates as CPI inflation is forecast to slow to an average of 5.9% in 2017, back into the 3-6% target range after a forecast 6.6% average for 2016
IMPLICATIONS FOR THE HOUSEHOLD SECTOR
The forecast for CPI inflation of 6.6% for 2016, 2 percentage points up from 4.6% in 2015, is the main reason for a forecast slowing in Real Household Disposable Income growth from 2.2% in 2015 to 0.1%, with higher inflation this year eating into nominal disposable income growth. Higher interest rates this year, compared to the average interest rate levels in 2015, are the “secondary partner” in driving expected slower disposable income growth for this year, while further forecast real economic slowdown from 1.3% in 2015 to an expected 0.2% also contributes.
All-in-all, a tough year for the consumer.
Read more here: Property_Barometer_ CPI_Inflation_20_July_2016