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Inflation edges up in January due to fuel inflation base effects

ARTICLE BY

  • Sanisha Packirisamy
  • Economist at Momentum Investments
  • Momentum Investments

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  • Statistics South Africa (SA) reported consumer price inflation (headline inflation or CPI) at 5.3% year-on-year (y/y) in January 2024, up from 5.1% y/y in December 2023, which was slightly below the Reuters median consensus of 5.4% y/y.
  • Core inflation rose to 4.6% y/y in January primarily due to higher banking fees. However, core inflation remains low because SA is not experiencing elevated services inflation and high wage pressures unlike, its global peers.
  • February could result in a higher CPI print due to medical aid contribution increases and fuel price hikes.
  • Transport inflation accelerated to 4.6% y/y in January from 2.6% y/y in December on the back of higher fuel inflation (3.3% y/y) boosted by base effects. On a month-on-month (m/m) basis, fuel inflation was 5.2% lower in January relative to December.
  • The Central Energy Fund’s (CEF) estimated under-recovery (as of 19 February 2024) is suggesting larger fuel price hikes of around R1.26 for petrol (inland, 95) and R1.28 for diesel (inland, 0.05%) in March.
  • The United States (US) Energy Information Administration (EIA) sees the price of Brent crude oil increasing into the mid-US$80/bbl range over the next few months. This is a potential upside risk for domestic fuel prices particularly considering the possibility of rand volatility as political uncertainty rises on the back of the upcoming 2024 SA general elections (29 May 2024).
  • SA motorists can expect to pay 6.25% more in toll fees nationally, effective 1 March 2024.
  • Food and non-alcoholic beverages inflation (NAB) moderated to 7.2% y/y in January from 8.5% y/y in December. There was evidence of easing inflation in vegetables and eggs in January. However, 50% of the list of 10 products that were more expensive in January 2024 compared to a year ago were vegetables and eggs which suggests that prices are still high.
  • In February 2024, the Western Cape Agriculture Department confirmed an outbreak of African Swine Fever (AFS) affecting pigs. According to the report, the outbreak is affecting small farmers in a suburb in the Western Cape and restrictions on movement have been implemented. The potential spread of this disease is a risk for food inflation. Pork contributes 1.1% (weight: 0.17) to the overall food basket.
  • International food prices, proxied by the United Nations (UN) Food and Agriculture Organisation (FAO) Food Price Index, were 1% m/m lower in January 2024 relative to December 2023.
  • In our view, headline inflation will soften throughout the year but volatility may remain a feature. We see headline inflation averaging 5.4% in 2024 from 6% in 2023 and a further moderation to 4.5% in 2025 is expected.
  • We expect the SA Reserve Bank (SARB) to keep interest rates steady at 8.25% in the March interest rate setting meeting as they are likely to continue flagging potential upside risks to inflation. The Monetary Policy Committee macro research and asset allocation | CPI | 21 February 2024 Page 2 of 5 (MPC) may consider cutting interest rates in the second quarter of 2024. Our baseline view incorporates three interest rate cuts ending the year at 7.5%.

 

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