Headline inflation was 7.4% y/y in June, up from 6.5% in May, and was at its highest since 2009. This outcome was slightly below our expectation of 7.5% but above the consensus expectation of 7.3%. Headline inflation accelerated by 1.1% m/m, with fuel contributing 0.5ppt, core adding 0.4ppt and food adding another 0.2ppt.
Core inflation lifted from 4.1% y/y previously to 4.4% and had monthly pressure of 0.6%. There were meaningful contributions from housing (up 1.0% m/m, 2.9% y/y and contributed 0.2ppt), public transport (4.3%, 14.3% and added 0.1ppt), household contents (1.2%, 4.7% and added a further 0.1ppt). The remainder of the monthly pressure is from smaller contributions by other components.
Fuel inflation increased by 9.4% m/m and 45.3% y/y, explained by the over R2 per litre increase in petrol prices and over R1 per litre increase in diesel prices in June.
Food and non-alcoholic beverages (NAB) inflation continued to accelerate, posting 1.2% m/m and 8.6% y/y. Cereals and meat inflation again provided the most upward pressure to the monthly gains (0.5ppt and 0.3ppt respectively), while dairy and eggs, as well as oils and fats, added around 0.2ppt each. There were smaller additions by the other components while fruit and vegetables contributed negatively. Higher food inflation has driven the inflation for low-income households to 9.1%.
Outlook
Headline inflation is expected to remain elevated for the remainder of the year, reaching a peak in the fourth quarter. For the year, we anticipate headline inflation to average 7.2%, driven by fuel and food inflationary pressures. Both petrol and diesel prices rose by over R2 per litre in July and should exert upward pressure to the upcoming inflation print, adding to persisting food price pressures. In addition, the survey of municipal increases will appear in core and electricity inflation. Beyond the next CPI data, lower brent crude oil prices have outweighed the weaker rand and the current month-to-date over-recovery in the petrol price is over R1.40 per litre. However, the potential cut to fuel prices would be mitigated by the lapse of the remaining 75c general fuel levy relief in August and brent crude oil prices continue to be supported by supply constraints.
The surge in inflation should result in higher surveyed inflation expectations, the latest survey results scheduled for publication tomorrow. The likely lift in expectations, alongside higher market inflation forecasts, as well as a more aggressive US Fed should place further upward pressure on local interest rates. The MPC is broadly expected to hike by 50bps points tomorrow, bringing the level of the repo rate to 5.25%. Some analysts expect a hike of 75bps, which would bring the repo rate to 5.50%. Despite the front-loading of interest rate hikes, the repo rate remains below the end-2019 level of 6.50% but we expect it to return to that level within a year.
The July inflation print is scheduled for release on 24 August. The major periodical surveys to look out for in the July release include municipal utilities (weighing around 7% in total CPI), funeral expenses and policies (2%), as well as housing insurance (1%).
Source: Stats SA, FNB Economics
Economist: Koketso Mano
