By Koketso Mano
Headline inflation lifted to 3.6% y/y in October from 3.4% in September. The print was slightly below our and the market expectation of 3.7%. Monthly pressure was 0.1%, upheld by rising services costs.
Core inflation was 0.1% m/m and 3.1% y/y, down from 3.2% previously. Services inflation recorded 0.2% m/m, and 4.0% y/y. Core goods inflation was -0.1% m/m and 1.0% y/y.
Average fuel prices lifted by 0.1% m/m and were 3.3% higher than at the same time last year - this is after posting annual deflation over the past 13 months.
Food and non-alcoholic beverages (NAB) inflation recorded 3.9% y/y, down from 4.5% previously. Average prices continued deflating, recording -0.2% m/m, reflecting steep contractions in vegetable prices.
Outlook
With this latest print in mind, we see headline inflation moving relatively sideways over the next few months. In November, inflation could average 0.1% m/m and 3.7% y/y. This uplift could be supported by higher food and NAB inflation, while changes in core inflation should be marginal and fuel inflation softens. Ultimately, headline inflation should remain below 4% over the next year, remaining well within the tolerance band before softening towards 3% over the medium term.
Core goods inflation should remain soft over the near term, supported by a stronger rand as well as favourable import shifts from a price perspective. This will compensate for normalising services inflation, which should keep the overall core number around 3%. While external trade dynamics suggest that goods inflation could surprise on the downside, services inflation, which could be considered the core within core, of around 4%, as well as sticky administered price inflation could keep the Monetary Policy Committee (MPC) conservative.
That said, the positive boost from a reform-driven Medium-Term Budget Policy Statement and a sovereign ratings upgrade with a positive outlook could do much to reduce risk premia and trend depreciation in the real value of the rand. This could mean that interest rates required to sustain capital inflows and balance the economy need not be as high and monetary policy could be shifting into more restrictive territory. This, alongside the appropriate level of restrictiveness required to uphold the shift in the inflation target, are top of mind ahead of the November MPC meeting where a hold is prudent, but the likelihood of a cut is material.
The November inflation print is scheduled for release on 17 December. There are no major periodical surveys conducted in November.
