South Africa's headline CPI inflation continued to ease in December

Johannesburg - Stats SA's December CPI data published this morning show headline CPI inflation at 7.2%, a further slowdown from 7.4% in November and the peak of 7.8% in July. The print was in line with the Thomson Reuters (TR) consensus, but 0.1pp higher than our forecast. The slowdown in headline CPI inflation was partly driven by fuel, where base effects continued to push the y/y inflation rate lower despite the 1.7% m/m increase in prices. But fuel prices were largely already known ahead of the release. What we and the consensus did not anticipate was the slowdown in core CPI inflation. Core inflation eased by 0.1pp in December against our and the TR consensus of a 0.1pp increase to 5.1%.

A moderation in housing and public transport inflation were the key factors behind the softer core print.

The quarterly survey of housing costs, which carry a weight of 16.5% in the CPI basket, showed an easing in housing inflation (i.e., rentals and owners' equivalent rent) to 2.7% in December from 3.1% previously (Figure 1). Meanwhile, public transport inflation eased markedly to 16.7% in December from 20.5% in November, mainly due to base effects. On the core goods side, 'alcoholic beverages' softened slightly after three consecutive months of big increases. That said, there were some offsets from other goods categories. Most notable were 'household contents and equipment' and vehicles where December inflation rose to 6.1% (November: 5.7%) and 6.7% (November: 6.3%),respectively. While risks of further widening of price pressures remain, we do not see, on balance, any alarming signals in the underlying December CPI data.

Food inflation eased slightly in December but not nearly as much as we had expected.

We had projected food inflation peaked in November at 12.5% and that it would ease to 11.9% in December. While food inflation did ease for the first time in eight months, the decline was more marginal to just 12.4%. The underlying food inflation details were quite mixed. Among the largest items by weight, meat and 'milk, eggs and cheese' inflation showed some moderation but 'bread and cereals' edged higher. Notably, however, the 3m/3m annualised rate of inflation on food fell 9.8% in December from 13.5%, showing further loss in the momentum of price gains. Additionally, SAFEX white maize and wheat prices have recently eased sharply in a manner that should soon reflect in food prices (Figure 2), although intensifying load shedding has recently caused some food producers, for example poultry, to warn of upside price pressures. On balance, we forecast that food inflation will ease further, averaging 10.9% in Q1 23, but there is always a high degree of uncertainty for this category.

Headline CPI inflation should fall further in the coming months.

Fuel inflation is set to continue to ease, given the large base effects and the recent moderation in Brent crude oil prices. We have assumed an average Brent crude oil price of around USD86/bbl for Q1 23. However, even that should see fuel inflation falling to about 5% by March compared with an average of 26.1% in Q4 22. This will carry a strong dampening effect on headline CPI inflation. Other than the regular volatile items, another important uncertainty for the path of inflation is the degree to which price pressures widen in the months ahead, especially as wages fixed early last year are renegotiated after a big push higher in inflation. We are inclined to believe that the delayed effects of the tightening in monetary policy should ensure that this is limited. We therefore see headline CPI inflation falling below 6% from May and ending this year at 4.8%.

We see today's data as supportive of our call for a 25bp hike next week.

The MPC has in its recent meetings expressed concerns about the risks of second-order effects of the recent price shocks. However, we believe the continued slowdown in headline inflation and the downside surprise in core CPI inflation should provide some comfort ahead of next week's MPC meeting. However, given the vote splits in recent MPC meetings, considerable uncertainty remains around the rate decision. The rise in inflation expectations, as reflected in the Q4 22 BER inflation expectations survey and the NERSA tariff hikes that were higher than we and the SARB had anticipated, will be of concern to the MPC. On balance, we still see a 25bp hike as more likely. (see South Africa Monetary Policy - We trim our January rate hike call from 50bp to 25bp, 9 January 2023).