By Mamello Matikinca, FNB Chief Economist.
Consumer price inflation rose 5.1% y/y in October from 4.9% in September; this was marginally lower than our expectation of a 5.2% y/y rise. The main driver behind the acceleration was the 99c/l rise in fuel prices, which translated into a 10.5% y/y rise in transport inflation – this contributed 1.5ppt to headline inflation. The recent decline in oil prices poses downside risk to our inflation forecast, if sustained headline inflation could average 5.2% y/y in 2019 against our current expectation of a 5.4% average.
The moderation in food inflation was more or less in keeping with our expectations – food inflation rose 2.9% y/y in October from 3.4% y/y in September. Year-on-year bread and cereals as well as fruit price inflation continued to contract, and, excluding sugar, there was a broad-based moderation in food prices. While we expect food inflation to remain relatively contained for the remainder of the year into the first half of the coming year, our forecasts point to an uptick in food inflation in the second half of 2019, as such a lower-than-anticipated rise in food inflation poses downside risk to our inflation forecast.
CPI for services remained eased to 5.1% y/y in October from 5.2% Y/Y in September. Goods inflation jumped from 4.8% y/y in September to 5.1% in October, led by a rise in durable and non-durable goods.
Core inflation (CPI excluding food, NAB, fuel and energy) remained unchanged at 4.2% y/y in October. Persistently low underlying inflationary pressures suggest that the SARB’s expectations of an increase in core inflation to a 4.8% average over the quarter of 2018 are high. The recent decline in oil prices and the improvement of the rand exchange rate may see the SARB downwardly revise its near-term inflation expectations. While our view is for a 25bps increase in the policy rate, benign underlying inflation may delay a policy rate hike.