LISTEN: Consumer price inflation starts the year on a higher note at 4.5%

LISTEN: Consumer price inflation starts the year on a higher note at 4.5%

LISTEN: Matlhodi Matsei, FNB Economist breaks it down.

CAPE TOWN – Consumer inflation started 2020 off on a higher note with the Statistics South Africa (StatsSA), reporting that consumer prices jumped to 4.5 percent year on year in January, from a modest 4 percent in December.

StatsSA reported that the outcome was marginally lower than expectations of a 4.6 percent year-on-year increase. On a monthly basis, inflation increased by 0.3 percent.

FNB economist Matlhodi Matsei said on Wednesday that the acceleration in headline consumer price index (CPI) was largely a reflection of domestic fuel price annual base effects. 

She said although the monthly movements in domestic fuel prices were somewhat measured in January, such as the price of 95 octane unleaded petrol declined by 14 cents per litre and the diesel price increased by 9c/l, the year-on-year increases were significant. The price of 95 octane unleaded petrol rose by more than 15 percent year on year, while that of diesel increased by more than 11 percent.

“The impact of higher domestic fuel prices was evident in the CPI for petrol, which surged to 13.7 percent year on year, from the 2.4 percent increase recorded in December. This contributed to the rise in transport CPI to 6.4 percent year on year from 3.3 percent previously and led to a greater contribution to headline CPI,” said Matsei.

Food price inflation dipped to 3.7 percent year on year in January from 3.8 percent year on year in December. Investec economist Kamilla Kaplan said the contribution of the food and non-alcoholic beverages category to headline CPI inflation lowered to 0.6 percent from 0.7 percent previously, with non-alcoholic beverage inflation also slowing in January.

“Food price growth is expected to remain contained on slower maize and meat price inflation in the coming months. Underlying inflation, or core, remained at multi-year lows in January, at a rate of 3.7 percent year on year versus a prior 3.8 percent year on year and versus the most recent peak of 5.9 percent year on year in December 2016. Core inflation should remain modest as subdued conditions in the property market and the broader economy are expected to persist,” said Kaplan.

Lullu Krugel chief economist PwC Strategy& and Dr Christie Viljoen PwC Strategy& Economist said in a note on Wednesday that the major driver behind the increase in inflation during January was transport cost. However, this was largely due to base effects in the year-on-year calculation as a result of the sharp drop in local fuel prices in December 2018-January 2019. 

“The ‘miscellaneous goods and services’ index also made a small contribution to the higher headline inflation reading as inflation on the sub-component for financial services climbed from 3.6 percent year on year in December 2019 to 6.2 percent year on year in January 2020. 

“Banking fees and accessibility are back in focus after the President Cyril Ramaphosa said in his State of the National (SONA) 2020 that the government will proceed with the establishment of a state bank as part of efforts to extend access to financial services to a wider part of the population,” said the PwC Strategy& economists.

The SARB Monetary Policy Committee (MPC) met in January and cut the repo rate by 25 basis points to 6.5 percent. This was the second interest rate reduction in six months following an identical cut in July 2019. 

Policymakers welcomed lower inflation outcomes and continued moderation in inflation expectations, according to PwC Strategy& economists. “The MPC added that their improved inflation forecasts opened some space for additional monetary policy easing.” 

PwC Strategy& economists said the implied path of interest rates – as generated by the central bank’s Quarterly Projection Model – indicated scope for another 25 bps cut in the repo rate later this year.