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Statistics South Africa (StatsSA) reported on 21 September that headline inflation decreased from 6% year-on-year (YoY) in July to 5,9% YoY during August.
The latest YoY figure (calculating the change over a 12-month period) was below market expectations of 6% YoY and the first reading to fall within the South African Reserve Bank’s (SARB) target range of 3%-6% since December 2015.
Christie Viljoen, senior economist at KPMG offers the following analysis:
This positive development was supported by the consumer price index (CPI) declining by 0.1% month-on-month (MoM) between July and August. Petrol was 7,6% MoM (99c/litre) cheaper as a result of a stronger rand exchange rate and lower international fuel prices. In addition, price indicators for medical products and vegetables were on average 0,5% MoM lower last month.
The benchmark food basket cost 0,9% MoM more in August. StatsSA recorded a 1,5% MoM increase in processed food prices, including a 2% MoM rise in the price of bread and cereals. This translated into this basket of staple food items costing 11,3% YoY more during the month. Overall, food cost on average 11,6% YoY more last month compared to a rate of just 4,4% YoY recorded in August 2015.
The Food and Agricultural Organisation (FAO) of the United Nations commented in a report released on September 12, that South Africa’s worst drought in 25 years has left 14,3-million (one in four) of its citizens vulnerable to food insecurity.
On a positive note, the National Agricultural Marketing Council (NAMC) said in a report published on August 31 that “food inflation is losing momentum” and could possibly return to single digits (that is, below 10% YoY) in the coming months.
The SARB MPC will take this information into account during its current deliberations over interest rates. Policymakers are in a three-day meeting and will on Thursday afternoon reveal their inflation forecasts and interest rate stance.
A recent Bloomberg survey among 27 local economists indicates expectations that the SARB will keep interest rates unchanged this week. It is also likely that the MPC will lower their near-term inflation forecasts as a result of the latest StatsSA data.
SARB governor Lesetja Kganyag said in a speech on 7 September that the central bank “would like to respond to slow and below-trend [economic] growth with lower interest rates”.
However, he indicated that monetary policy decisions necessarily involve trade-offs, and that the MPC “has opted for trade-offs that serve [its] inflation-targeting mandate”. Indeed, price stability remains the primary mandate of the SARB despite weakness in the local economy.