After reaching its highest level since August 2003 of 6% year-on-year, core inflation in South Africa dropped to 5,7% in June, but analysts said on Wednesday this does not change underlying concerns, and interest rates are still likely to rise.
Core inflation excludes volatile changes in food prices, municipal rates and monetary policy, and the May high was viewed as being reflective of the broad-based pressures that the central bank has recently highlighted as concerning.
“Core inflation actually fell, but the trend in core inflation is still higher and is still right at the top end of the 3%-to-6% target range of the South African Reserve Bank [SARB],” noted Tolga Ediz, an emerging-markets analyst from Lehman Brothers.
A senior bond dealer from Rand Merchant Bank in South Africa, Erik Nel, added that he does not believe the slight dip in core inflation should be a focus of the market. Some players in the local bond market have highlighted core inflation as a potential indicator that inflation is peaking and interest rates may be coming down. He said these players appear to be protecting positions based on this assumption.
Nel pointed out that while it is OK for developed countries to focus on the core indicator at the moment, a country like South Africa is not in the same boat. Instead, he highlighted higher food and oil prices as continuing concerns.
He concluded that players out of London are also not being lulled into a false sense of complacency based on the core reading in South Africa, and will instead be “happy to offer” the bond market at key levels.
Ediz added that headline items were the main drivers of CPIX at 6,4%, with food price inflation rising to 9,5% from 8,7%. CPIX was expected by the market at 6,3%.
“The components suggest that both goods and service prices contributed to the elevated level of inflation. True, once again food was the biggest factor, contributing 2,5 percentage points to annual inflation. The transport component contributed one percentage point to inflation.
“That said, service price inflation also remained high — the personal-care component rose by 0,6% month-on-month and 6% year-on-year, and household operation rose by 7,9% year-on-year.
“Indeed, service price inflation is now running at 5,7% year-on-year, uncomfortably high for the SARB. CPIX excluding housing is running at 6,4% and, excluding food prices, is running at 5,3% [the top end of the SARB’s target range], though rising by a hefty 0,5% month-on-month in June,” concluded Ediz.
The next meeting of the SARB on interest rates takes place on August 16.
The bank raised the repo rate by 50 basis points to 9,5% on June 7, just a week after CPIX was reported to have broken the upper band of the target. The June increase in CPIX was the third successive month it had been above the upper band of the inflation target. — I-Net Bridge