SA CPI falls to 5.3% y/y

Meat prices remain sticky, rising to 9.4% y/y

CPI inflation slowed in line with SBGS’s expectation, from 5.8% y/y in November to 5.3% y/y in December. This was below Bloomberg’s consensus expectation of 5.5% y/y.
The CPI inflation rate averaged 6.1% y/y in 2014, up from 5.8% in 2013 and we expect it will slow in 2015, and average 3.6% for the year. However, the extent of the slowdown will be dependent on the oil price for which we have assumed an average of $65/bbl in 2015 and the USDZAR exchange rate, for which we have assumed an average of 11.60. Our oil team anticipates a recovery in Brent back to $70/bbl in 2016, which, along with a pick-up in food inflation (fig 2), and a USDZAR of 11.30, would see CPI averaging around 6.0% again next year. Under these oil and USDZAR price assumptions then, the reprieve in inflation is welcome, but temporary.
We note that in September 2014, prior to any fall in the oil price, our inflation forecast for 2015 was a benign 5.2% y/y, well below consensus expectations at the time of 6.0% y/y. This was premised on global disinflationary forces, including lower soft commodity prices, as well as slack in domestic demand. At 3.6%, our current CPI forecast for 2015 continues to rely on global disinflation, outside of oil. Within this context we cite the UN Food and Agriculture Organisation’s (FAO) report: “After two years of buoyant production of corn, wheat and soya beans, the cushion of cereals stocks is now equal to 25 per cent of annual global consumption, the highest ratio in more than a decade.” Deflation in China and the recent downward revision of global growth forecasts by both the World Bank and IMF are supportive of our disinflationary view.
The drop in the inflation rate in December is due in large part to the lower petrol price, which fell from R12.98/l to R12.29/l. On its own this shaved 0.38ppts off November’s 5.8% y/y inflation rate. Petrol fell a further 127c/l in January 2015, which, ceterus paribus, will shave 0.7ppts off December’s inflation rate.
Food inflation also slowed, from 7.7% in November to 7.4% in December, taking a further 0.04ppts off November’s headline inflation rate. We had estimated that food inflation would fall to 7.1% y/y but noted that due to sticky meat prices, the risk to our forecast lay to the upside. In the event, meat CPI rose in December, from 9.1% y/y to 9.4% y/y. The acceleration in retail meat prices seems to be a product of higher wholesale meat prices - meat PPI rose from 12.0% y/y in October to 14.7% y/y in November. This is despite a sharp drop in yellow maize prices, such that the divergence between maize and meat prices has intensified (fig 1). While lower maize prices in 2014 should have fed through to lower food PPI and CPI inflation (fig 3), according to the abattoirs, stickiness in meat inflation has been as a result of farmers taking advantage of the low maize price to reduce the supply of meat and gain some control over the fall in meat price inflation. Looking ahead, we expect food inflation to moderate in 2015, before picking up again in 2016 (fig 2).
Moderation in inflation was also evident in hotel prices, which declined 0.8% m/m, and is unusual for December. YoY hotel inflation moderated from 9.2% to 8.3% and together with slower restaurant inflation reduced December’s CPI by 2bps versus November. Housing and utilities (specifically owner’s equivalent rent) also slowed, from 5.8% y/y to 5.7%, reducing its contribution to CPI by 0.03ppts. Countering the dramatic fall in inflation, we saw acceleration in insurance costs, from 7.8% y/y to 8.0% y/y, and in vehicle prices from 6.9% to 7.1% y/y (fig 4).

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