The overall inflation figure for March eased to 6.3 percent down from 7 percent in February but it’s the make up of the number that’s worrying for consumers, as Stanlib economist Kevin Lings shows in the analysis below. Tertiary education fell to 0 percent, following the #FeesMustFall campaign last year, while food inflation almost hit double figures. And Lings doesn’t buy into the short-term relief as Stanlib forecast a figure around 8 percent by the end of the year. With more pain expected as he also sees interest rates at 7.5 percent over the same period. A good read.– Stuart Lowman
By Kevin Lings*
In March 2016, South Africa’s headline CPI inflation increased by a substantial 0.8%m/m. Despite the relatively large monthly increase, the annual rate of change in consumer prices slowed to 6.3%y/y, down from 7.0%y/y in February 2016. The annual increase in inflation during March was slightly lower than market expectations for a rise of 6.4%y/y (STANLIB 6.5%y/y). Food prices, in particular, rose fairly significantly during the month. In contrast, tertiary education inflation dropped to 0%y/y. Consumer inflation is still expected to move noticeably higher over the coming months, ending 2016 at an estimated 8.0%y/y.
Food prices rose by a very substantial 1.7%m/m in March, pushing the annual rate of food inflation sharply higher to 9.8%y/y, up from 8.8% in February and 7.0%y/y in January 2016. The increase in food inflation during March included a 7.9%m/m rise in fruit prices (18.7%y/y), a 3.4%m/m jump in bread and cereal inflation (13.3%y/y), a 2.3%m/m increase in sugar, sweets and dessert prices (11.7%y/y) and a 2.1%m/m acceleration in oils and fats (18.1%y/y). All indicators suggest that food inflation is going to continue to increase over the coming months, reflecting partly the effect of the weaker Rand, but also the impact of the current drought conditions. We expect food inflation to end 2016 higher at around 14%y/y. (Food has a weight of 14.2% in the inflation basket). This will help to push overall consumer inflation higher to around 8% by end 2016.
Encouragingly, tertiary education inflation dropped from 9.8%y/y in February to 0.0%y/y in March 2016. This largely reflects the impact of the “fees must fall” campaign. Education inflation has been one of the highest components of consumer inflation in recent years, averaging 9.2% in 2015. The most recent drop in tertiary education inflation means that total education inflation has fallen from 9.3%y/y in February 2016 to only 4.6%y/y in March. Primary and secondary school inflation remains relatively high at 8.0%y/y.
Other noticeable changes in inflation during March 2016 included a 69c/l drop in the fuel price, which subtracted 0.1 percentage points from the monthly change in inflation. This benefit will, unfortunately, be reserved next month given the 88c/l increase in the petrol price at the beginning of April 2016.
CPI excluding food and petrol is still within the inflation target at 5.7%y/y, while core inflation (CPI excluding food, fuel and electricity) eased to 5.4%y/y in March, down from 5.7%y/y in February 2015. This slowdown in core inflation will help the Reserve Bank to keep interest rates unchanged in the very short-term. It would also suggest that the pass-through from a weaker Rand is not yet hugely problematic. However, there is still the real risk that inflation expectations rise as core inflation drifts higher and moves above the inflation target in the second half of 2016. Services inflation was recorded at 5.7%y/y, while administered price inflation has eased to 6.4%y/y helped by the lower petrol inflation. The inflation rate for pensioners was recorded above the target at 6.3%y/y.
For 2014 as a whole, SA CPI inflation averaged 6.1%, up slightly from an average of 5.8% in 2013 and 5.7% in 2012. For 2015, SA inflation averaged an impressive 4.6%. However, we are very concerned about a sharp upward trend in SA inflation during the second half of 2016, and expect inflation to average 6.7% for the year as a whole, ending 2016 at around 8.0%. This expected increase in inflation is due to a combination of factors, namely unfavourable base effects, a sharp increase in food inflation as a result of drought conditions and weaker exchange rate, higher electricity and water prices, a further increase in excise duties and the fuel levy in the 2016 National Budget, and an increased pass-through impact on inflation of the weaker exchange rate. Our inflation forecast model suggests this risk of higher inflation in 2016 could manifest more noticeably in the second half of 2016.
In 2015, the SA Reserve Bank became concerned about a broadening of inflationary pressure and decided to start to increase interest rates. While this was partly in response to concerns about inflation, it also reflected their worry about South Africa’s vulnerability to foreign capital outflows should the Federal Reserve decide to start to normalise interest rates. They followed this with a further hikes of 75bps in 2016. Importantly, emerging economies are back “in-favour” with most emerging market exchange rates strengthening this year after being over-sold in 2015. This will also encourage the Reserve Bank to leave rates unchanged in the very short-term. However, given our outlook for SA inflation later in 2016, we think the SA Reserve Bank will continue to increase interest rates in 2016. At this stage the Repo rate is forecast to end 2016 at 7.50%.
- Kevin Lings is chief economist at Stanlib.