Inflation numbers mark the peak in headline inflation

By Mamello Matikinca, FNB Economist

Headline inflation negatively surprised in December, rising 6.8%y/y from 6.6% in November.

This is notably higher than our 6.6% forecast and the market expectation of 6.5%. The detail in the survey points to a broadening of inflationary pressures – core inflation (CPI excluding food and NAB, petrol and energy) rose 5.9%y/y from 5.7%.

Relative to our estimates food inflation as well as housing and utilities surprised on the upside, rising 12.0% y/y and 5.6%, respectively versus our expectation of 11.7% and 5.2%. Meat prices surged 7.4% y/y to record the highest annual increase over the year. Grain prices maintained their upward trajectory rising 17.4% y/y while vegetable prices continued to increase, albeit at a slower rate (8.1% vs. 12.2%). Other notable contributors to the elevated inflation rate included recreation and culture which rose 7.6% y/y from 6.1% as well as restaurants and hotels which rose 7.1% previously 6.5%.

Over the month inflation rose 0.4% led by housing and utilities and food prices. However, the rise was limited by a 20c/l decline in the petrol prices which contributed -0.1 percentage points to the December outcome.

In our view, today’s inflation numbers mark the peak in headline inflation. Our preliminary estimate for January is 6.5%- barring any significant changes following the rebasing of the inflation basket. Details regarding the new basket will be published in February. While we expect inflation to fall below 6% this year, the rate of deceleration will, however, not be as pronounced as we had initially forecast, as the improvement in food prices is expected to be limited by rising meat prices. Meat prices over the year were supported by the drought induced culling.

However, rebuilding of stock combined with the reduced poultry supply due to avian flu in Europe suggests that prices will remain sticky for longer. However, the stabilisation of the rand is expected to mitigate the rise in food prices. We, nonetheless, view the risks to the inflation outlook to be on the upside. This suggests that the SA Reserve Bank is unlikely to cut the repo rate any time soon. Furthermore, risks stemming from global events could destabilize the rand in the months ahead, and could deter the expected improvement of the inflation rate. As such we believe the SA Reserve Bank will opt to keep rates on hold until greater clarity emerges.