CPI probably peaked in May, monthly inflation muted

Johann van Tonder, Economist at Momentum and Herman van Papendorp, Head of Investment Research & Asset Allocation at Momentum Investments.


  • May’s year-on-year (y/y) headline consumer price inflation (CPI) rate increased to 5.2% from 4.4% in April.
  • Month-on-month (m/m) CPI rose by 0.1% in May, less than April’s 0.7%.
  • May’s y/y headline CPI was heavily influenced by a low base and increases in fuel, meat and new vehicle prices.
  • The low base also contributed to y/y core CPI to increase from 3.0% in April to 3.1% in May.
  • The y/y headline CPI rate should trend downward henceforth, even with July’s high municipal rate increases.
  • Conditions are, however, favouring marginally higher core and headline CPI in 2022.
  • Some Monetary Policy Committee (MPC) members of the South African Reserve Bank (SARB) may turn hawkish later this year, but we expect the first increase in the repo rate to only occur early next year.

CPI affected by a low base and high fuel prices in May

Headline y/y CPI for May increased to 5.2% from 4.4% in April and 3.2% in March. The core CPI rate increased to 3.1% y/y from 3.0% in April and 2.5% in March.The trimmed mean index, which excludes the highest and lowest price changes, increased to 4.3% y/y from 3.9% in April and 3.5% in March. On a m/m basis, headline CPI increased by 0.1% in May, less than the 0.7% in March and April.

Last year’s sharp decline in commodity prices, which contributed to establishing a low base in 2020, had another large effect on May’s y/y CPI rate. For instance, crude calculations show y/y headline CPI could have been 3.7% in May if the effect of the low base on fuel price increases were removed.

Table 1 provides a summary of the y/y increases in the prices of items that will affect CPI most this year.

Headline CPI peaked in May, but municipal rate increases will add pressure in July

Although the headline CPI rate has been trending upward, it in all likelihood peaked in May, and should subside in the second half of the year. The main reason behind the increase from 3.2% in March to 4.4% in April and 5.2% in May can be ascribed to the low base established in 2020.

The low base was caused by an ‘international lockdown’, which triggered a sharp decline in the prices of international commodities, such as oil. In addition, the lockdown also prevented Stats SA from surveying the prices of several items for a number of months in 2020.

Prices of commodities has since the second quarter of 2020 recovered strongly, particularly since February 2021. For instance, the price of oil, which has a large effect on South Africa’s headline CPI, hassurpassed December 2019 levels. The price of a barrel of Brent crude oil was $66 in December 2019, decreased to $23 in March 2020, recovered to $25 in April 2020 and to $33 in May 2020. Its current price is $74 per barrel.

The low oil prices during especially the second quarter of 2020, established a low base for fuel prices. The effect of the low base on headline CPI for April and May 2021 can be demonstrated by simple calculation. Using the average fuel price index for the six months preceding the start of the lockdown as base provides a headline CPI rate of 3.7% for April 2021 instead of the measured 4.4%. For May 2021, it is also 3.7% instead of 5.2%. Importantly, many other items are affected by a low base, meaning headline CPI could be even lower if base effects are removed.

Further analysis shows that a small number of items are driving headline CPI upward. A mix of six items and categories with a collective weighting of 35.9% in the CPI basket were responsible for 70.9% of the y/y headline CPI rate of 5.2% in May (see chart 1). These items and categories are fuel, municipal services (electricity, water and other services), meat, medical insurance, new vehicles and alcohol and tobacco.

Since CPI is a continual increase in the general price level of a large number of goods and services, these numbers show that South Africa does, at this stage, not have a CPI problem.

This is also reflected in core CPI, which excludes food and fuel prices, and is usually used to determine the presence and magnitude of second-round effects. Core CPI increased by 3.1% in May, marginally higher than the 3.0% of April.

In addition, on a m/m basis, all the main CPI measures declined (see chart 2). For instance, trimmed mean CPI, which excludes the effect of the 5% highest and 5% lowest price increases, increased by 0.2% in May compared to 0.4% in April, while m/m core CPI was 0.0%, suggesting little evidence of second round CPI.

However, even though headline CPI is driven by a low base and a small number of items, some local and global factors are causing an increase in for instance food prices (refer to table 1). Some of these factors are likely to persist, such as the shortage of palm oilresulting from weak harvests. This is fuelling price increases in vegetable oils. Meat prices, which increased 8.5% y/y in May are also bound to continue its increase due to the continual impact of years of droughts as well as sporadic outbreaks of foot and mouth disease.

Looking two to three months ahead, headline CPI will in July and August, when Stats SA surveys municipal rate increases, receive upward pressure from this source.Some of the largest municipalities have already announced their rate increases for 2021-22(see table 2). Electricity tariffs are due to increase by14.6% in all municipalities except for Cape Town that decided to subside part of the increase. Water and sanitation rate increases will range between 5.0% and 10.0% and that of property and refuse removal rates between 2.0% and 6.0%. Should these increases berepresentative of all municipalities, municipal rate increases may contribute an additional 0.2 percentage points to headline CPI.

n the longer run, several factors will put upward and downward pressure on CPI (see table 3). The weight of evidence suggests that headline CPI will be higher in 2022, but should average around the 4.5% mark the MPC of the SARB is targeting. As the MPC stated they are data dependent, they will in all likelihood first ascertain whether price increases are transitory or not.

However, a lot can still change and change quickly as we witnessed a week ago when the Federal Reserve appeared to become more hawkish. This contributed to a fast depreciation in the rand exchange rate, which may put upward pressure on headline CPI.

It is possible that some MPC members will start turning hawkish and vote for a 25-basis point increase in the repo rate in one or more of the next three MPC meetings this year. However, they are likely to first ascertain whether the current pace of increases in commodity prices will persist, whether strong second-round inflation takes hold and for base effects to work its way out of the system. Within this context, the first increase in the repo rate is expected in the first half of 2022.

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