Strong rand still outweighs commodity price gains in December CPI

Yesterday's CPI is a pleasant reminder that markets can get carried away by headlines. Everyone has noticed that global food prices have gone up sharply and that oil is flirting with $100 per barrel and projecting this into revised forecasts for South African inflation. Today’s number, however, shows that rand strength has not yet worked through the whole pricing change in South Africa.

Most of the inflation items in today’s release that have any tradable component were better than expected. Furniture, vehicles, personal care and clothing items are either flat or negative on the month. To us this suggests that we are going to see further disinflation on tradable goods.

Some of the services components were also softer than expected. Inflation in the hospitality industry has for the first time fallen below the top end of the target band. The heavyweight insurance component was negative on the month and will in due course dip below the top of the band, while the monthly increase in domestic worker inflation is consistent with annual increases in domestic workers’ salaries of below 5%. Going forward, we expect further moderation in services inflation rates.

The big risk going forward is of course food prices, given what is happening to global soft commodity prices. The December inflation release suggests that none of these pressures have yet been felt by our retailers, but in due course food prices will begin to rise and as things stand at the moment, will probably rise to between 6% and 10% towards year-end.

Putting this together, we get an inflation picture which points to inflation essentially going sideways at sub-4% levels until the middle of the year. Only then will inflation begin to breach the 4% level as the negatives from possible food inflation begin to outweigh the disinflationary forces emanating from the strong rand and moderating services inflation.