Publications
Partners
Cape Town - Economists say the steep increase in petrol and food prices as the main reasons for the surprise latest Consumer Price Index (CPI) of 5.8%
This is 0.4 of a percentage point higher than the corresponding annual rate in December 2013, Statistics SA said on Wednesday. On average, prices increased by 0.7% between December 2013 and January 2014.
The latest CPI shows that the transport index increased by 1.2% between December and January, mainly due to a 38c/litre increase in the price of petrol.
According to Merina Willemse, an economist with the Efficient Group, the latest higher inflation figure reflected more pressure on the food and transport price categories of the basket.
"The pass-through of the rand seems more prominent at this stage and poses a higher risk to inflation, consistently breaching the upper limit of the SA Reserve Bank's 3%-6% inflation target band," she said.
"This spells more interest rate hikes later on. For now we are forecasting another 100 basis points increase in interest rates for 2014."
Upside surprise
Gina Schoeman, an economist with Citi Research, a division of Citigroup Global Markets, said the upside surprise to Citi's forecast was food inflation.
"We had been expecting a rise to 4.0% year-on-year (YoY) from 3.5% YoY previously, but instead CPI food proved higher at 4.3% YoY," said Schoeman.
"On a monthly basis food prices increased 2.0%. Seasonally, prices do typically rise in January, but the ramp up in bread and cereals, meat, fish and vegetables was significant."
She noted that vehicle inflation continues to rise, which is partly a currency story.
"In addition, the positive and higher contribution from the residual further suggests that rand-driven inflation is starting to gain momentum," she said.
"Finally, although core inflation remained at 5.3% YoY for its fifth consecutive month, there was a notable rise in clothing and footwear inflation, to 3.7% YoY (3.4% YoY previously)."
Next interest rate hike
She expects more upside for inflation this year. This would be due to upside pressure building in petrol - 39c/litre in February and a likely 26c/litre in March - and food and rand pass-through.
"We continue to see an above-6.0% print in May. We see two peaks in CPI this year: One in June at 6.5% YoY and a final peak of 6.5% in the final quarter of 2014," she said.
"By the first quarter of 2015 we believe that the 150bps in rate hikes that we are factoring in - 50bps in January, March and July, respectively - will be enough to push CPI back into the target range."
The latest CPI also came as a surprise to Nomura emerging markets expert Peter Attard Montalto.
"January headline CPI surprised us to the upside a notch at 5.8% as the increased food price pressures from the poor harvest that caused a major rally up in core food prices like maize fed through to consumers faster than we expected," he said.
"Core surprised us to the downside a notch (but in line with consensus) at 5.3%, showing pass-through remains exceptionally muted in the current growth environment, despite the developments in the rand."
He still expects the next Sarb interest rate hike will be in July once pass-through to core has become evident.
"However, the coming months are likely to see significant volatility, given both base effects in headline and core as well as food price moves," he said.
"Of course, if the global mood shifts and South Africa outflows with it, then the Sarb could go earlier. One of the Sarb’s key worries is also a very rapid shift in pricing by retailers, which could come at any time with the rand this weak, and would also mean a hike."
This is 0.4 of a percentage point higher than the corresponding annual rate in December 2013, Statistics SA said on Wednesday. On average, prices increased by 0.7% between December 2013 and January 2014.
The latest CPI shows that the transport index increased by 1.2% between December and January, mainly due to a 38c/litre increase in the price of petrol.
According to Merina Willemse, an economist with the Efficient Group, the latest higher inflation figure reflected more pressure on the food and transport price categories of the basket.
"The pass-through of the rand seems more prominent at this stage and poses a higher risk to inflation, consistently breaching the upper limit of the SA Reserve Bank's 3%-6% inflation target band," she said.
"This spells more interest rate hikes later on. For now we are forecasting another 100 basis points increase in interest rates for 2014."
Upside surprise
Gina Schoeman, an economist with Citi Research, a division of Citigroup Global Markets, said the upside surprise to Citi's forecast was food inflation.
"We had been expecting a rise to 4.0% year-on-year (YoY) from 3.5% YoY previously, but instead CPI food proved higher at 4.3% YoY," said Schoeman.
"On a monthly basis food prices increased 2.0%. Seasonally, prices do typically rise in January, but the ramp up in bread and cereals, meat, fish and vegetables was significant."
She noted that vehicle inflation continues to rise, which is partly a currency story.
"In addition, the positive and higher contribution from the residual further suggests that rand-driven inflation is starting to gain momentum," she said.
"Finally, although core inflation remained at 5.3% YoY for its fifth consecutive month, there was a notable rise in clothing and footwear inflation, to 3.7% YoY (3.4% YoY previously)."
Next interest rate hike
She expects more upside for inflation this year. This would be due to upside pressure building in petrol - 39c/litre in February and a likely 26c/litre in March - and food and rand pass-through.
"We continue to see an above-6.0% print in May. We see two peaks in CPI this year: One in June at 6.5% YoY and a final peak of 6.5% in the final quarter of 2014," she said.
"By the first quarter of 2015 we believe that the 150bps in rate hikes that we are factoring in - 50bps in January, March and July, respectively - will be enough to push CPI back into the target range."
The latest CPI also came as a surprise to Nomura emerging markets expert Peter Attard Montalto.
"January headline CPI surprised us to the upside a notch at 5.8% as the increased food price pressures from the poor harvest that caused a major rally up in core food prices like maize fed through to consumers faster than we expected," he said.
"Core surprised us to the downside a notch (but in line with consensus) at 5.3%, showing pass-through remains exceptionally muted in the current growth environment, despite the developments in the rand."
He still expects the next Sarb interest rate hike will be in July once pass-through to core has become evident.
"However, the coming months are likely to see significant volatility, given both base effects in headline and core as well as food price moves," he said.
"Of course, if the global mood shifts and South Africa outflows with it, then the Sarb could go earlier. One of the Sarb’s key worries is also a very rapid shift in pricing by retailers, which could come at any time with the rand this weak, and would also mean a hike."
