This chart shows what’s driving inflation in South Africa

 ·25 Jul 2019

Data from StatsSA out this week showed that headline consumer price inflation (CPI) remained unchanged at 4.5% while core inflation inched higher to 4.3% in June 2019.

The main contributors to headline inflation included housing and utilities, transport and food, which added 1.2%, 0.8% and 0.6% respectively in June 2019, said the Macro Research team at Momentum Investments.

Administered price inflation slowed to 6.9% (below the 7.1% average), driven by a softer contribution from fuel prices. 

Momentum noted that inflation in most administered prices breached the 6% upper limit, led by water and services showing a 10.9% year on year increase in June 2019, followed by public transport, which was significantly effected by petrol prices.

Services inflation remained within the target range of 3%-6%, while food inflation rose above the lower band of the target range to 3.2% in June 2019 from 2.8% in May 2019, largely driven by an uptick in meat prices.

The petrol price increased nine cents per litre in June 2019 – and represented the main driver of transport’s 0.8% contribution to the headline figure, the economists at Moment Investments said.

The fuel price grew by “a softer” 7.4% year-on-year, from 11.4% in May 2019.  “This will likely have a reveres effect in July as the petrol price declined at the start of the month,” Momentum said.

The Reserve Bank revised its assumption for the Brent crude price downward to $67 per barrel in 2019, from $69, while it kept its assumption for 2020 and 2021 unchanged at $68.

The Central Energy Fund, the economists said, has under-recovered the price by 12.6 cents per litre for the period between 28 June and 23 July 2019, supported by a more resilient exchange rate. Therefore a mild cut in the price of petrol is expected in August.

Momentum Investments expects inflation to remain contained close to the midpoint of the target range in 2019 and 2020 on weak demand-pull price pressures. “In Momentum Investment’s view, low growth and well behaved inflation outcomes leave the door open for a further reduction in the interest rates,” it said.

The cycle, it said, is likely to remain shallow, given the need to boost growth through the implementation of structural reforms, rather than through more aggressive monetary policy stimulus.


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