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Sun, Jul 3, 2022

Consumer inflation accelerated to 6.5% y/y in May

Headline inflation was 6.5% y/y in May, up from 5.9% in April. This outcome was a shock to our and the consensus expectation of 6.0% and 6.1%, respectively. Headline inflation accelerated by 0.7% m/m, with core and fuel contributing over 0.2ppt, while food added 0.4ppt.

Core inflation was recorded at 4.1% y/y and 0.2% m/m. We had a considerable increase in alcoholic beverages and tobacco inflation (0.8% m/m, 6.6% y/y), household contents (0.7% m/m, 4.3% y/y), vehicles (0.5% m/m, 6.1% y/y), as well as restaurants and hotels (0.5% m/m, 6.2% y/y). Alcoholic beverages and tobacco added around 0.1ppt to the monthly pressure in core inflation, while the other components made smaller contributions.

Fuel inflation increased by 1.9% m/m and 32.5% relative to the same month last year – driven by the rise in diesel prices in May.

Food and non-alcoholic beverages (NAB) inflation accounted for most of the shock, with an enormous increase of 2.1% m/m and 7.6% y/y, likely indicating that more of the global price pressures are filtering through to local prices. Cereals and meat inflation provided the most upward pressure (just over 0.6ppt each), while dairy and eggs as well as oils and fats added nearly 0.3ppt each. Vegetables, NAB, and other foods contributed around 0.1ppt to the monthly pressure.

Outlook

Headline inflation should rise strongly in the coming months. With the update of today’s data, and on petrol and food price pressures, headline inflation looks set to breach 7% in June. Despite the fuel levy relief extension, petrol prices rose by over R2 per litre in June. Also, the new housing data should contribute to core inflation pressures, adding to more immediate second-round effects from fuel to public transportation and eventually to other goods and services. Meanwhile, higher input costs and global supply constraints should continue to reflect in food price pressures. Beyond June, the weaker rand has driven the month-to-date under-recovery in the petrol price to nearly R2 per litre, and this would add to the lapse of half of the R1.50 general fuel levy relief in July. Oil prices should be supported by persistently strong demand amid potential European Union sanctions on Russian oil. The upside surprise from today’s data will likely result in upward adjustments to annual inflation projections and place further upward pressure on local interest rates.

The June inflation print is scheduled for release on 20 July. The major periodical surveys to look out for in June include housing (weighing 16.49% in total CPI), domestic worker wages (2.53%), as well as taxi, bus and train fares (2.13%).

Figure 1: Headline vs core inflation
Figure 2: Contributions to headline inflation
Figure 3: Fuel inflation
Figure 4: Food inflation

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