Headline inflation for January came in lower than market expectations, thanks to the low oil price, but analysts warn that underlying inflationary pressures remain and food prices could climb this year.
This week Statistics South Africa released the latest consumer price index (CPI), which showed that headline inflation dropped 0.9% from 5.3% in December last year to 4.4% in January, its lowest level in almost four years.
It was widely expected, given that the oil price remained below $50 a barrel of Brent crude for much of January, which had resulted in lower petrol and diesel prices domestically.
As a result, transport inflation dropped by 3% between December and January.
The South African Reserve Bank’s monetary policy is largely guided by inflation targeting so, with inflation appearing to be under control, it means an interest rate hike is unlikely any time soon.
Food inflation has moderated for a fifth successive month, dropping to 6.6% in January from 7.4%.
Bread and cereals inflation dropped to 4.5% from 4.9%, and vegetables inflation slowed to 1.0% from 4.9%.
Meat inflation remains elevated but slowed to 8.7% from 9.4% at the end of 2014.
“We think that global food price developments, good harvests in 2014 and lower oil prices are likely to support slowing domestic food price inflation during the first half of 2015,” an HSBC economist, David Faulkner, said in a note.
“Further fuel price deflation and moderating food inflation were the main drivers and should support further headline disinflation in the near term.”
Annabel Bishop, an Investec group economist, said in a press release that agricultural food price inflation dropped from 13.3% year on year in March last year to 1.4% year on year by the end of 2014.
Theoretically, fuel price fluctuation should affect food prices, as diesel
is a major input for producers, but South African consumers have not yet seen significant savings.
“There is a lag of around three months between food prices at the producer price index [the price at the factory gate] to consumer price index level, with a lag of up to nine months between agricultural commodity prices and the impact on CPI inflation,” Bishop said.
But the maize price had risen from R3 617 a bushel in September last year to R4 280 a bushel, on dry weather conditions, indicating that food price inflation might start to rise this year if the emerging drought was not broken, Bishop said.
“Grain SA reports that some areas are very dry with follow-up rains critical to the 2015 maize harvest.”
In particular, Grain SA had said the summer grains were at a critical stage and the next 14 days would determine food prices over the next 12 months, she said.
“Should rain not come in the key maize areas, the CPI forecasts above will be at risk … Food price inflation has a weighting of 14.2% in the CPI, with petrol at 5.68%.”
Headline inflation had dropped sharply but, Faulkner said, core inflation rose slightly to 5.8% compared with January last year, “highlighting that underlying inflation pressures remain entrenched”, he said.
Core inflation discounts temporary or volatile price fluctuations, such as that of energy or food items.
But, Bishop said, a true measure of core inflation would exclude all state-administered prices, particularly water costs, which recorded a heady inflation rate of 8.5% in January this year, when compared to the same period last year.
Faulkner said HSBC expected headline inflation to average 4.2% throughout 2015 and that there would be no rate hikes this year.
Investec expected an interest rate hike of 25 basis points in July, and a 50 basis points hike in January next year, as “the global monetary policy cycle normalises and South Africa follows suit”, Bishop said.