Standard Bank Research Team
Standard Bank
Oil to shave 38bps off Dec CPI
CPI inflation fell from 5.9% y/y in October to 5.8% y/y in November, in line with our and consensus expectations. We expect CPI inflation may fall further, to 5.3% y/y in December.
Petrol, which fell 45c/l in November, such that petrol price inflation slowed from 2.7% y/y to 1.4% y/y, shaved 7bps off October’s 5.9% y/y CPI inflation rate. Petrol fell a further 69c/l in December, and will shave 38bps off November’s 5.8% y/y inflation rate. Ceterus paribus, this would result in CPI of 5.4% y/y in December.
In 2015, assuming oil averages $73 and the USDZAR 11.60, oil price inflation in rands will average -23% y/y (fig 8). Alongside food inflation trending lower (fig 2), we expect this will result in average CPI inflation of 3.7%. We note that the last time we saw the oil price fall to this extent, in 2009, inflation fell from 11% in 2008, to 7.2% on average in 2009 and reached a low of 3.1% in January 2010 (fig 6).
As expected, food inflation moderated slightly in November, to 7.7% y/y, from 8.0% y/y in October. This was despite bread and cereals inflation rising, from 5.2% y/y to 5.5% y/y. Meat, dairy and sugar price inflation remains elevated, but meat and sugar slowed in November, from 9.3% y/y to 9.1% y/y, and 8.9% y/y to 8.2% y/y respectively, while dairy accelerated from 12.4% y/y to 12.9% y/y (fig 10). Meat inflation has been sticky as a result of reduced culling by cattle farmers, in order to regain control over supply and pricing of meat, this has been facilitated by lower animal feed price inflation (fig 11 & 12).
Due to the transmission from higher wheat and maize prices in the first quarter of this year, there is a chance of renewed pressure on food prices, particularly bread and cereals in Q4:14 , which is already evident (fig 14). In 2015 we have forecast for food to trend lower and average between 4.5% and 5.0% in 2015 (fig 2, & 9 to14).
Core inflation (ex food & NAB, petrol & energy), rose to 5.8% y/y in November, up from 5.3% at the end of 2013, indicating that second round effects of the weaker currency are gradually passing through to core inflation, unlike in mid-2013 (fig 1). Will this be sustained as CPI falls? We think that it may be sustained and that core may rise above headline inflation temporarily. We note in figure 3 that this is seldom the case, however it is more likely during times when food inflation falls close to zero and/or oil moves into deflation (fig 5). As can be seen in figure 4, the extent to which core rises has historically been capped by administrative price inflation excluding petrol and paraffin. This is currently at 6.6%, but has been trending lower as electricity inflation falls. The increase in electricity tariffs to around 10% at a municipal level as well as water tariffs, which are expected to increase by between 10% and 14% in 2015, may put upward pressure on administrative inflation.
We think that as headline CPI falls, the SARB will refer more to core inflation as a risk. This will allow the SARB to continue to engage in hawkish rhetoric, which can reduce the extent to which they actually have to raise rates.
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