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By Kevin Lings*
In April 2021, South Africa’s headline CPI inflation rose by a further 0.7%m/m, which was above market expectations for an increase of 0.5% (STANLIB 0.4%m/m), pushing the annual rate of inflation up from 3.2%y/y in March 2021 to 4.4%y/y in April 2021 (market expected 4.3%, STANLIB 4.2%). During 2020 consumer inflation averaged a mere 3.3%, down from 4.1% in 2019 and 4.6% in 2018. The 2020 average was the lowest annual average inflation rate South Africa has experienced since 2005, when consumer inflation also averaged 3.3%.
Overall, while the headline inflation rate remains well contained (core inflation now up 3.0%), there are three areas of upside pressure that have emerged more recently. These include the petrol price that is being aggravated by base effects, a NERSA approved 15% increase in the electricity price this year and upward pressure on food inflation despite a good agricultural season and a somewhat stronger Rand. As a consequence, we still expect SA inflation to increase just over 5% next month, remaining around 4.5% to 5.0% during the next 12 months, before moderating in the second half of 2022 (see discussion below). This means that despite the current upward bias, we still expect SA inflation to remain well inside the inflation target for the foreseeable future, averaging around 4.3% for 2021 and 4.5% in 2022. This should allow the Reserve Bank to keep interest rates unchanged for an extended period.
During February, food inflation rose by a significant 1.0%, which follows a higher than expected increase of 0.8%m/m in March 2021. This pushed the annual rate of food inflation up much more than expected to 6.7%y/y, and compares with 5.9% in March 2021, 5.4%y/y in February 2021 and 5.6%y/y in January 2021. We had expected SA food inflation to ease in Q2 2021 given the solid agricultural season and the relative strength of the Rand. Unfortunately, manufactured food inflation is still trending higher, reaching 6.8% in March 2021, while agricultural food inflation is at 9.4%y/y, although this is at least down from a recent peak of 14.0%y/y in January 2021. Hopefully, consumer food inflationary pressure start to ease over the coming months, albeit modestly, which remains our base case expectation.
As mentioned a couple of months ago, Nersa agreed to Eskom receiving a 15% electricity tariff increase in F20/21. For direct buyers of electricity from Eskom, the tariff increase is already effective (from 1 April) while for municipalities the price increase will be effective from 1 July. This increase in reflected in our current inflation forecast (see chart attached), but will only be captured in the CPI in the July and August reports.
Petrol (fuel) inflation rose by a very substantial 5.4%m/m in April 2021, pushing the annual rate of fuel inflation up dramatically to 21.4%. Importantly, the annual rate of increase in fuel inflation was exacerbated by base effects, which will be significantly more pronounced next month (fuel has a higher weight than electricity in the inflation basket). The increase in fuel inflation during April reflects the 100c/l increase in the petrol price at the start of the month (95 octane). Fortunately, the petrol price declined by 9c/l (95 octane in Gauteng) at the beginning of May, although this will have almost no impact on the consumer price index.
Core inflation was also above expectations in April 2021, recording an increase of 0.3%m/m. This resulted in the annual rate rising from 2.5%y/y to 3.0%y/y. Core inflation has been below the mid-point of the target for the past 36 months, averaging a mere 3.8% in that period. And while the latest core inflation data was above expectations, the underlying level of inflation is SA remains well contained, which should encourage the Reserve Bank to hold interest rates steady for an extended period.
- Kevin Lings is chief economist at Stanlib.
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