Inflation declines in May

Statistics South Africa (StatsSA) reported on June 20th that consumer price inflation declined from 4.5% year-on-year (y-o-y) in April to 4.4% y-o-y in May. The latest reading is in line with economists’ expectations and is comfortably within the South African Reserve Bank (SARB) target range of 3%-6%. The StatsSA inflation report can be viewed here.

The small decline in y-o-y headline inflation during May was associated with slow inflation on food and non-alcoholic beverages. Food price inflation declined to 3.0% y-o-y – the lowest reading since 2013. According to StatsSA, bread & cereals, fruit, oils & fats, as well as sugar, sweets & desserts are now all cheaper compared to a year ago. Fruit prices declined by 2.3% month-on-month (m-o-m) during May, while breads & cereals were 0.8% m-o-m cheaper.

Meat price inflation has declined notably over the past nine months, declining from a peak of 15.6% y-o-y in September 2017 to 7.8% in May. One of the contributing factors was a sharp decline in wholesale pork prices since the start of the year, falling to a four-year low during April. This was strongly associated with a slump in consumer demand for ready-to-eat processed meat products following an outbreak of listeriosis linked to this product category. The drop in demand resulted in an oversupply on the market. Other factors contributing to lower meat prices included lower feed costs and a stronger exchange rate (making imports cheaper).

Figure 1: Continued decline in food price inflation

Sources: StatsSA, SARB

The SARB Monetary Policy Committee (MPC) met on May 22nd-24th, and its 7 members decided unanimously to make no change to interest rates. However, policymakers indicated that risks to the inflation outlook had now shifted to the upside due to a weaker exchange rate and higher international oil prices impacting expectations for local fuel prices. In an interview with Bloomberg TV on June 19th, SARB Deputy Governor Kuben Naidoo warned that if the softer rand causes an increase in consumer price inflation and related forecasts, the MPC may have to raise interest rates. The rand was trading near R14/$ early this week, while oil prices were at a 3-year high in May.