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Food prices drive inflation up

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Statistics South Africa (StatsSA) reported on November 23 that headline inflation increased from 6,1% year-on-year (y-o-y) in September to 6.4% y-o-y in October.
The latest y-o-y figure (calculating the change over a 12-month period) was above market expectations of 6,3% y-o-y.
It was also the ninth reading in 2016 so far to breach the upper limit of the South African Reserve Bank’s (SARB) inflation target range of 3%-6%.
The benchmark food basket cost 0,9% m-o-m more in October. StatsSA recorded a 0.9% m-o-m increase in the cost of meat and a 1,1% m-o-m rise in fish prices.
While bread and cereals cost on average only 0,4% m-o-m more last month, the category was 16,5% y-o-y pricier last month.
At the same time, vegetables cost nearly 15% y-o-y more while fruit prices were up by an average of almost 25% y-o-y. Inflation was only 5,5% y-o-y when removing the influence of food and beverage prices.
The Food and Agricultural Organisation (FAO) warnes that the rise in food prices could add more people to the estimated 14,3-million South Africans seen as being vulnerable to food insecurity at present.
On a positive note, the Southern African Development Community (SADC) Food, Agriculture and Natural Resources (FANR) directorate recorded above-average rainfall during October and early November in South Africa’s main maize growing areas.
South African Reserve Bank governor Lesetja Kganyago said in a speech on October 20 that the central bank expects inflation to average 5,8% in 2017 from a mean of 6,4% this year. With this in mind, he reiterated a previous comment that the interest rate hiking cycle “may be nearing its end”, though cautioned that “this does not mean … interest rate reductions are imminent”. Indeed, inflation would need to be firmly inside the 3%-6% target range before monetary policy easing will be considered.
The SARB’s Monetary Policy Committee (MPC) is currently in a three-day meeting to discuss the country’s lending rates. A Bloomberg survey conducted last week indicates that local economists expect policymakers to keep interest rates on hold this week. Apart from October’s higher-than-expected inflation rate, another key risk factor is the roughly 7,5% depreciation in the rand since the previous MPC meeting during September, which will put upward pressure on the SARB’s inflation forecasts.