Share

Market 'surprised' by December's 6.8% inflation rate

Johannesburg – December’s inflation of 6.8% was above market expectations of 6.6%, according to analysts.

In a statement released on Wednesday, Stanlib’s chief economist Kevin Lings explained that the inflation rate has peaked and is expected to stabilise in 2017.

“This slowdown in inflation is largely based on a meaningful moderation in SA food inflation,” added Lings. In the longer term, inflation may be lower, to an average of 5.2%. 

READ: Inflation soars to 6.8% in December

Food prices rose dramatically from 4.9% in 2015 to close to 12% in 2016. Food prices in December rose by 0.8%, mostly owing to the rise in meat, vegetable and fruit prices. Meat price increases were particularly high at 7.4%.

The recent rainfalls may signal a better agricultural season this year.

“This should lead to a meaningful moderation in food inflation during 2017, which in-turn, will help to bring headline consumer inflation back inside the target range within the next six months,” he said.

During 2015 the inflation averaged at 4.6%, but the impact of the drought in 2016 pushed it up to 6.3%.

“We are still flagging a relatively elevated SA inflation rate over the next two to three months,” said Lings.

SA food inflation forecast

Among the main contributors will be fuel price hikes, as well as the expectation for Treasury to increase the fuel levy and excise duties during the National Budget in February. The increase in petrol prices could contribute 0.1 to 0.2 percentage points to inflation next month.

The South African Reserve Bank (Sarb) may keep an eye on the core inflation which is at 5.9%, up from 5.7% in November.

“The Reserve Bank will remain concerned that core inflation is still relatively high and close to the top-end of the inflation, but it seems unlikely that core inflation will breach the upper-end of the target in the short-term,” he explained.

He added that it is unlikely that the reserve bank will raise interest rates at the next Monetary Policy Committee (MPC) meeting next week. “Having already hiked rates by 200bps (basis points) since the recent low, the Reserve Bank can afford to leave rates unchanged in the short-term.”

ALSO READ: Why SA won't see interest rate cuts soon

FNB economist, Mamello Matikinca said that that the inflation “negatively surprised”. FNB forecasted inflation to be 6.6%. Matikinca added that following the peak, inflation is expected to fall below 6%.

However the rate of the improvement may not be as quickly as expected. The rising meat prices may slowdown the improvement in food prices.

“Meat prices over the year were supported by the drought induced culling,” she explained.

“We, nonetheless, view the risks to the inflation outlook to be on the upside,” she said.

Sharing Lings’ views, Matikinca added that the Sarb will likely keep interest rates on hold. A rate cut may only be introduced once there is better clarity on the improvement of the inflation rate.

FNB’s household and property sector strategist, John Loos, added that a more stable rand could curb inflation in the short term. The rand has strengthened by 23% over the past year.

Fin24 previously reported on Nomura emerging markets economist Peter Attard Montalto’s expectations that the Sarb would keep rates unchanged.

The stability of the rand suggests that the market may expect a rate cut soon, said Montalto. However he cautioned that this stability may be undone if the rand weakens in the medium term.

Nomura views inflation to be 5.7% by the fourth quarter of 2018, the Sarb’s forecast is 5.6%.

“We think the Sarb cannot cut rates as long as this long-run forecast is not on a path towards 4.5% and certainly as long as it is above 5.0%,” he said. 

Read Fin24's top stories trending on Twitter:

We live in a world where facts and fiction get blurred
Who we choose to trust can have a profound impact on our lives. Join thousands of devoted South Africans who look to News24 to bring them news they can trust every day. As we celebrate 25 years, become a News24 subscriber as we strive to keep you informed, inspired and empowered.
Join News24 today
heading
description
username
Show Comments ()
Rand - Dollar
18.97
-0.3%
Rand - Pound
23.97
-0.3%
Rand - Euro
20.48
-0.1%
Rand - Aus dollar
12.36
-0.1%
Rand - Yen
0.13
-0.4%
Platinum
911.60
+1.6%
Palladium
1,012.97
+1.1%
Gold
2,214.54
+0.9%
Silver
24.90
+1.0%
Brent-ruolie
86.09
-0.2%
Top 40
68,346
+1.0%
All Share
74,536
+0.9%
Resource 10
57,251
+2.9%
Industrial 25
103,936
+0.6%
Financial 15
16,502
-0.1%
All JSE data delayed by at least 15 minutes Iress logo
Company Snapshot
Editorial feedback and complaints

Contact the public editor with feedback for our journalists, complaints, queries or suggestions about articles on News24.

LEARN MORE
Government tenders

Find public sector tender opportunities in South Africa here.

Government tenders
This portal provides access to information on all tenders made by all public sector organisations in all spheres of government.
Browse tenders