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South Africa: Inflation spike lowers the hurdle for a 75bp hike in July

22 June 2022 Jeff Schultz, Senior Economist at BNP Paribas South Africa

South Africa registered a large upside surprise in headline CPI at 6.5% y/y (+ in May vs 6.1% expected - a 5 year high.

Core was, however, in line with our estimates up at 4.1 y/y up from 3.9% in April. A very big bounce in food prices explains the miss, these jumped a sizable 2.2% m/m to 7.8% y/y and are clearly now more reflective of the price pressures being seen globally. Fuel climbed 1.9% m/m, in line with our estimates, though notably public transport prices actually fell 1.1% m/m in May which implies that excluding this slump, the pick-up in core could have been bigger and will likely see a pick up towards 4.5% in July as the public transport industry gears up to raise tariffs in response to record fuel prices.

Second round price pressures a cause for concern: Our seasonally adjusted diffusion indicator showing the % of items in the basket rising >1.0% m/m vs those <=1.0% has climbed strongly to >30% of the basket (it’s highest since 2016), up from 23% last month and just 6.5% of the basket 4 months ago. Notably too, our 'core-core' indicator of output gap sensitive price items is back at parity with the official core measure of CPI. As highlighted in, South Africa: Wheels greased for more policy action, GDP levels back at pre-Covid levels coupled with evidence of building second round price pressures means that the SARB will likely favour a more frontloaded hiking cycle.

Bottom line: A big food price bounce accounted for the bulk of the headline CPI miss in May and will concern the SARB that the risks of more acute imported price inflation are materialising. Inflation looks set to breach 7.0% from June (and remain above 7.0% into mid-Q4) by our estimates. While we already remain well above the sell-side consensus in our expectations for a more frontloaded hiking cycle (and on how high inflation peaks), we think the hurdle for a more aggressive 75bp hike next month (versus our current expectation for 50bp) is now substantially lower post today's CPI detail.

Sources: Stats SA, SARB, Reuters, BNP Paribas estimates

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