Consumer Price Index climbs 5.2% y/y in May

By FNB Economist, Koketso Mano

As we expected consumer inflation is up by 5.2% y/y in May 2021, after posting 4.4% y/y in April. Bloomberg consensus had pencilled in consumer inflation of 5.1%. The April and May prints are influenced by base effects created by historically low oil prices at the height of global lockdowns in 2020. In addition, core CPI items that were banned for sale were imputed with average headline inflation and so these low oil prices also affected core inflation. Core inflation currently sits at 3.1% y/y, up from 2.9% in April. Monthly trends are important in understanding inflationary pressures that are not driven by base effects. Headline and core inflation are up by only 0.1% and 0.0% m/m, respectively.

May is a low survey month and there are limited developments to gauge core inflation; only alcoholic beverages (0.3% m/m) and clothing and footwear (0.2%) have seen m/m pressure, which are offset by lower inflation in other categories to give overall muted monthly core inflation. Explaining the m/m rise in headline inflation is the 0.12ppt increase in food inflation, while fuel shaved off 0.03ppt.

Fuel inflation is decelerating on a monthly basis. Even as oil prices have continued to climb on improving demand and tighter stocks, the stronger rand supported lower local fuel prices in May. Fuel inflation is down 0.6% m/m and up 37.4% y/y.

Food and non-alcoholic beverages inflation is posting strong inflation outcomes and is the primary source of upward inflationary pressure to headline inflation; it is up 0.7% m/m and 6.7% y/y. The subcategories that are driving food price pressure are meat (up by 1.2% m/m and 8.5% y/y), milk, cheese and eggs (1.7% and 5.7%) and oils and fats (5.2% and 20%). Together, these items explain 60% of the annual acceleration in food and non-alcoholic beverages inflation.

Outlook

This May outcome should be the peak for headline inflation. We expect y/y headline inflation to trend lower for the remainder of this year – ending 2021 at 4%. Core inflation should also moderate, remaining closer to the bottom of the SARB’s 3% to 6% inflation target range. Food inflation should remain elevated, closer to 6%, and continue to provide upward pressure to the headline figure.

Risks to the outlook would come from a weaker rand that could drive fuel inflation higher. Other supply-side risks emanate from global raw material shortages, but the extent to which these will be passed onto consumers is likely to be limited, given that there is only a gradual improvement in demand. Overall, second-round effects from supply-side shocks to core inflation should not be too much of a concern as core inflation remains well below the midpoint of the inflation target range and expectations should remain well anchored.

In the next CPI release we will get new housing data (16.84% of CPI), domestic worker wages (2.45%), transport (taxis and local buses, 1.54%), as well as motor vehicle insurance (0.58%).