In December 2011, headline inflation rose by a relatively modest 0.2%m/m, with the annual rate remaining unchanged at 6.1%y/y. This was below market expectations, which was for an increase of 6.3%y/y (Bloomberg). For 2011 as a whole, SA CPI averaged a respectable 5.0%y/y. This is up from an average of 4.3% in 2010. For 2012 we expect SA inflation to average 5.8%.
During December 2011 food inflation continued to move a little higher, but most other categories of inflation recorded very little change on a month-on-month basis. Food prices rose by a further 0.5%m/m in December, which added 0.1 of a percentage point to the monthly rise in CPI. The monthly increase if food prices pushed the annual rate of food inflation up to 11.6%y/y, which is the highest food inflation reading since May 2009.
The increase in food inflation during December was concentrated in three main categories, namely meat prices, up 2.0%m/m (16.7%y/y), fruit prices up 2.8%m/m (7.2%y/y), and breads and cereal prices up 0.8%m/m (9.7%y/y). In contrast, vegetable prices fell 2.9%m/m (11.9%y/y), while fish prices were down 0.7%m/m (6.5%y/y). We expect that the upward momentum in domestic food price inflation will plateau at around current levels, but then ease noticeably in the second half of 2012; helped by lower international food prices (see chart attached).
Within the housing category of inflation, home rentals rose by 0.8%m/m, which was in-line with expectations. This contributed a further 0.1 of a percentage point to the monthly rise in inflation. Overall rental inflation remains well contained at 4.5%y/y.
It is worth noting that a number of categories of inflation (which each have a relatively low weight within the index) recorded declines during December. This included wine (-1.0%m/m), spirits (-0.5%m/m), appliances (-0.2%m/m), telecommunication equipment (-1.8%m/m), recreational equipment (-1.6%m/m), and personal care (-0.6%m/m). There was also a modest decline in the petrol prices. All these categories helped, at the margin, to keep inflation at 6.1%y/y.
CPI excluding food and petrol is still well within the inflation target at 4.4%y/y, recording a monthly rise of 0.3%m/m. Clearly, underlying inflation remains relatively well contained, albeit with a modest upward bias. Services inflation has edged slightly higher over the past few months to 5.6%y/y.
As we have mentioned over the past few months, it is concerning to see that the inflation rate for very low income earners is now at 8%y/y (mainly because of food inflation), while the inflation rate for pensioners is up at 6.9%y/y.
Looking ahead, there are still some upside risks to SA inflation. These include a range of administered prices (electricity, water, fuel etc) as well as the recent Rand weakness. The extent to which these price pressures will impact core/underlying inflation will be heavily influenced by the strength of the domestic economy, which is currently slowing, thereby creating less opportunity for companies to pass-on cost increases.
At this stage the inflation rate is unlikely to pose a significant concern for the monetary authorities, even though it is slightly above the top end of the target range. The Reserve Bank seems reasonably comfortable in tolerating an inflation rate slightly above the target, especially in an environment where economic activity is subdued and global inflation is projected to moderate during the course of the year. Hence the Reserve Bank can simply continue to leave interest rates unchanged for an extended period.
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