By Koketso Mano
Headline inflation was 3.0% y/y in June, up from 2.8% in April and May. The print was slightly above our 2.9% forecast but below the consensus expectation of 3.1%. Monthly pressure was 0.3%, led by contributions from core items as well as food and non-alcoholic beverages (NAB) inflation.
Core inflation was also 0.3% m/m, but slightly weaker on an annual basis, posting 2.9%, down from 3.0% previously - highlighting the continued gains from base effects. Monthly pressure was driven by housing as well as restaurants and hotels. Services inflation recorded 0.4% m/m, and 3.7% y/y. Core goods inflation was 0.1% m/m and 1.1% y/y.
Average fuel prices declined by 0.4% m/m and 11.2% y/y.
Food and non-alcoholic beverages (NAB) inflation was 5.1% y/y, up from 4.8% previously. Monthly inflation was 0.7%, led by meat inflation.
Outlook
With an update of today's data, we see headline inflation rising to 3.6% in July, with monthly inflation of 1.0% which will reflect higher utility costs. In addition, there should be monthly pressure on food that will not be mitigated by fuel price deflation, as has been the case in the past few months. Instead, fuel costs will also add upward pressure to monthly headline inflation.
Positive base effects will also fade, assisting the lift in inflation over the coming months. That said, headline inflation should remain contained around the midpoint of the target range. Soft inflation will be supported by weak oil prices, a stronger rand, and a slow recovery in economic activity. We forecast headline inflation to average 3.5% this year.
Contained inflation expectations are beneficial to a continued cutting cycle by the South African Reserve Bank. We think there is space for one more 25-basis point cut in this cycle before rising inflation holds monetary policy steady. We currently predict that the cut will be in September - given a contentious trade environment that could weigh on sentiment, the cost of borrowing, and the rand. However, the dollar's weakness as well as terms of trade gains from higher precious metal prices have supported a stronger rand and this could countervail the Monetary Policy Committee's fears surrounding global dynamics, choosing instead to focus on a benign local environment. Therefore, we could see an earlier cut which would come through in the 31 July meeting.
The July inflation print is scheduled for release on 20 August. Major periodical surveys conducted in July include utilities (7.27% weight in CPI), funeral expenses and insurance (1.48%), as well as home insurance (0.85%).
