Koketso Mano, FNB Economist

Headline inflation increased 5.9% y/y in December, up from 5.5% in November, slightly above ours and the consensus expectation of 5.8%. Headline inflation increased by 0.6% m/m. This reading of headline inflation is the highest in nearly five years and uncomfortably close to the SARB’s inflation target upper band of 6.0%. Nevertheless, inflationary pressures should have subsided in January with the fuel price cut of 68 cents providing some relief to consumers. 

Core inflation increased by 3.4% y/y and 0.3% m/m. Major contributions were from the latest survey on housing (which increased 0.8% m/m and 1.7% y/y, contributing 0.2ppt to the monthly pressure) and public transport (up 3.3% m/m and 9.9% y/y, adding a further 0.1ppt). Services inflation lifted to 3.3% (from 3.1% previously) on the back of the ongoing normalisation in housing, domestic worker wages, restaurants and hotels, as well as elevated public transportation inflation. 

Fuel inflation has been a prominent source of inflationary pressure and upside risk. Fuel prices increased by 75 cents in December, translating to 3.8% monthly pressure and 40.5% relative to the same period last year. Accounting for nearly 30% of administered prices, fuel inflation made a meaningful contribution to the 1.1% m/m rise in administered price inflation. Administered prices posted 15.6% annual inflation.

Food and NAB inflation increased by 0.5% m/m and 5.5% y/y, flat from November. Meat provided the most upward pressure (up 1.2% m/m and 8.6% y/y, contributing 0.4ppt to the monthly pressure in food and NAB). The remainder of the pressure was from smaller contributions by the other food subcategories. Vegetables lowered the overall pressure (down 1.9% m/m and shaved off 0.1ppt).

Outlook

Using today’s print to inform our update, we project headline inflation at 5.5% in January and 4.6% on average for 2022, up slightly from the now confirmed 4.5% average in 2021. Core inflation should gradually rise towards 4.0% as services normalise. In addition to the services mentioned above, we will have higher medical aid inflation, but education inflation could remain contained as the Minister of Higher Education has proposed a 4.3% increase in tuition fees. On the core goods front, vehicle inflation could remain elevated for most of this year. Electricity inflation should post double-digit figures once again this year as Eskom has applied for a 20.5% increase (translating to around 17% on the municipal level). Food and NAB inflation is expected to continue its deceleration from a currently high base, but upside risks are presented by excessive rainfalls damaging crops. Fuel price inflation remains a pressing source of near-term risk, with Brent crude oil prices finding renewed strength.

There are indications that global supply bottlenecks could be easing, but Covid mutations and resurgent waves of infections could impede these improvements. Most of South Africa’s imported unit value indices for consumer-related goods remain contained relative to pre-pandemic levels. Unit values for crude petroleum and food products were still elevated in the latest reading.

The BER inflation expectations survey is scheduled to be published next week and will provide indications on how price and wage setters are processing current inflation. For the MPC, which also meets next week, a considerable shift in two-year ahead inflation will be a concern. We think another 25bps hike by the SARB is on the cards, as interest rate normalisation continues amid tightening global financial conditions. As before, this normalisation should consider the protracted economic recovery.

Major survey outcomes in January include expenses (2.16% weight in CPI), lotto tickets (1.75%) as well as building and household contents insurance (1.14%).

Note: Stats SA will be applying new CPI weights with the January 2022 print. The new base period will be December 2021.

Source: Stats SA, FNB Economics