Statistics South Africa (StatsSA) reported on January 23 that consumer price inflation declined notably from 5,2% year-on-year (y-o-y) in November 2018 to 4,5% y-o-y in December.
Christie Viljoen, PwC strategy and economist, unpacks the figures
The latest reading was in line with expectations and resulted in full-year inflation averaging 4,7% in 2018 from 5,3% in the preceding year.
The StatsSA report (available here) confirmed that last year’s inflation averaged close to the mid-point of the South African Reserve Bank (SARB) target range of 3%-6%.
The decline in headline y-o-y inflation during December was associated mainly with a sharp drop in transport inflation. The cost of private transport operation dropped by 6,7% month-on-month (m-o-m) because of a notable decline in fuel prices. The petrol price fell by R1.84/litre (more than 10%) in early December, with diesel costing R1.45/litre (9%) less last month. This was largely attributed to lower international fuel prices (associated with slowing global economic growth and rising oil production in North America), while a slightly firmer rand also added some price relief.
Food price inflation declined from 2,8% y-o-y in November to 2,4% y-o-y in December – the lowest reading in eight years. The price of staples like bread and cereals increased by an average of only 1,1% y-o-y during the month, while fruit cost 1,5% y-o-y less. Favourable food price developments resulted in headline inflation for low-income South Africans falling to just 3,7% y-o-y in December compared to 4,8% y-o-y at the upper end of the income scale.
Following the easing in y-o-y inflation during December, there is also an improved outlook for some key inflation drivers in 2019Q1.
For example, fuel prices again declined in January. Petrol prices were down another 8,5%, while diesel was 10,5% cheaper – and may ease further in February.
Meat prices (accounting for 35% of StatsSA’s food basket) could also decline in coming months. Several neighbouring countries have placed a ban on the import of South African meat following the outbreak of foot-and-mouth disease in Limpopo, resulting in a likely increase in domestic supply of red meat.
The rand is also currently trading around 5% stronger against the US dollar compared to a month ago.
The SARB Monetary Policy Committee (MPC) commented last week that the country’s near-term inflation outlook had improved significantly since November 2018, citing lower international fuel prices, a stronger rand exchange rate, and lower domestic food price inflation. The central bank now expects headline inflation to average 4,8% in 2019, down from a previous estimate of 5,5%. As a result, and based on its internal modelling, the SARB currently sees interest rates increasing by only 0.25 percentage points towards the end of 2021.