EMEA Snap:South Africa,CPI has peaked,retaining rate cut view in Q2
The newly revised CPI basket yielded an outcome of 6.6% yoy for January, in line with our expectations, beating consensus of 6.8%.
Core inflation also subsided, easing to 5.5% from 5.9% in (DBe 5.4% vs consensus of 5.8%). Most of the decline can be ascribed to rebasing impact (December 2016=100). Food inflation also receded from 12% yoy in December to 11.8% yoy. In turn, the sharp moderation in core inflation was due to base effects in gym fees last year. Recreational and cultural services jumped by 8% mom last year, versus only 0.2% this year. Core inflation should reverse back towards 5.7% in February, as the base effect reverts to normal again. Fortunately, durable goods inflation (fx-sensitive) seems to have moderated to 6.6% yoy (from 7.1%) and semi-durables have also eased to 5.4% (from 5.7%). Non-durable goods seem to be stickier at 8.2% yoy in both months. A possible sugar tax to be announced next week could add upside momentum again.
Bottom line: Inflation could be especially sticky in the short-term, owing to the directional bias in fuel prices and medical insurance. Food inflation should still recede, supported by a stronger rand and a good maize crop. So far, the fallout of the armyworm should be contained, but remains a risk to the outlook. Inflation is forecast at 5.9% this year and 5.1% in 2018. Core inflation should recede to 5.4% this year and 4.8% in 2018, thanks to a stronger exchange rate, reduced second-round effects and lower wage growth. This matters especially since services comprise a larger share in the new basket. We maintain that there is a more than even chance that the SARB will cut rates in Q2 (May).
New basket, new risks?
We see some forecast risks in the short-term, owing to the degree of directional price shifts in medical insurance (surveyed next month), tertiary education and housing data (see Figure 2). Services are also marginally higher in this basket (51.3% vs 50.1%). At face value one would argue that this may imply a heightened degree of inflation persistence - due to the sticky nature of administered prices. However, recent developments, in electricity tariffs, education fee increases and wage inflation may suggest otherwise. While we will discuss the forecast implications of the new basket in a separate publication, it’s worth noting that if food inflation were to subside to 6.6% this year (from 10.8%); headline inflation would be around 0.5% lower than last year. However, nearly all of this disinflation could be offset by rising fuel inflation, despite a lower food new CPI basket (4.6% vs 5.7%). Fuel prices rose a mere 2.1% yoy last year, and we expect an increase of 8.8% this year. This will add around 0.3% to CPI, partly offsetting the disinflation of food prices.
SARB’s forecasts yet to be revised
The Bank’s is yet to incorporate the CPI revisions. Headline inflation was revised up to 6.2% from 5.8% for 2017, while forecasts for 2018 were left unchanged at 5.5%. SARB expects food inflation of 7% this year (revised from 6.5% in January), and fuel inflation was revised up to 12.8% yoy (from 5.7%). Based on the new weights, the SARB’s forecast could still fall by 0.4% owing to food, but this would be fully offset by fuel inflation which adds 0.5%. Overall, it’s hard to speculate on the direction, but it’s plausible that any revisions to the Bank’s forecast, even if lower, are likely to be minimal.