CPI - A watershed inflation release

CPI inflation slowed to 6.2% in January – well below what the market expected – giving us great confidence that the middle of the target band will be reached by the middle of the year. Most of the broad categories contained in the inflation number are beginning to behave well and are consistent with the general decline in inflation.

January was a high survey month, which created a lot of risk as to where the inflation number would come out. Several infrequently surveyed items are included in the January release, including banking services, funeral services and some insurance items, and most of these numbers show that services inflation is moderating in line with overall inflation.

The impact of the strong rand was again evident among tradable items, with vehicle prices down 0.4% and furniture and clothing broadly flat on the month.

Although food prices did increase on the month, largely as a result of the January seasonal impact on food, it is important to note that the food index has been in decline for the last six months. In addition, the fact that SA is looking at an all-time record maize harvest gives us confidence that food prices will remain flat for the year. We may even see food deflation at some point.

The market has been woefully behind the curve, as this is now the fifth inflation release that has surprised on the downside. The market has been almost fixated with pending electricity hikes and the idea that inflation is stuck at 6% due to structural factors.

The electricity price tariff increases approved by NERSA today is also towards the low end of expectations, moderating one of the big risks to inflation in the short and medium term. We expect that this could result in inflation coming in 0.5% lower than the market is currently forecasting.