Inflation climbs in October as food prices increase further

Christie Viljoen, Senior Economist at KPMG.

SARB MPC decides on interest rates tomorrow.

Statistics South Africa (StatsSA) reported on November 23 that headline inflation increased from 6.1% year-on-year (y-o-y) in September to 6.4% y-o-y in October. The latest y-o-y figure (calculating the change over a 12-month period) was above market expectations of 6.3% y-o-y. It was also the ninth reading in 2016 so far to breach the upper limit of the South African Reserve Bank’s (SARB) inflation target range of 3%-6%.

Source: StatsSA, SARB, KPMG research

The benchmark food basket cost 0.9% m-o-m more in October. StatsSA recorded a 0.9% m-o-m increase in the cost of meat and a 1.1% m-o-m rise in fish prices. While bread and cereals cost on average only 0.4% m-o-m more last month, the category was 16.5% y-o-y pricier last month. At the same time, vegetables cost nearly 15% y-o-y more while fruit prices were up by an average of almost 25% y-o-y. Inflation was only 5.5% y-o-y when removing the influence of food and beverage prices.

Source: StatsSA

The Food and Agricultural Organisation (FAO) warned that the rise in food prices could add more people to the estimated 14.3 million South Africans seen as being vulnerable to food insecurity at present. On a positive note, the Southern African Development Community (SADC) Food, Agriculture and Natural Resources (FANR) directorate recorded above-average rainfall during October and early November in South Africa’s main maize growing areas.

SARB Governor Lesetja Kganyago said in a speech on October 20 that the central bank expects inflation to average 5.8% in 2017 from a mean of 6.4% this year. With this in mind, he reiterated a previous comment that the interest rate hiking cycle “may be nearing its end”, though cautioned that “this does not mean … interest rate reductions are imminent”. Indeed, inflation would need to be firmly inside the 3%-6% target range before monetary policy easing will be considered.

The SARB’s Monetary Policy Committee (MPC) is currently in a three-day meeting to discuss the country’s lending rates. A Bloomberg survey conducted last week indicates that local economists expect policymakers to keep interest rates on hold this week. Apart from October’s higher-than-expected inflation rate, another key risk factor is the roughly 7.5% depreciation in the rand since the previous MPC meeting during September, which will put upward pressure on the SARB’s inflation forecasts.