Consumer inflation reverts to the target band
After 13 consecutive months above the 6% upper limit of the inflation targeting range, headline inflation fell to 5.4% y/y in June. This outcome is down by 0.9ppt from the 6.3% that was recorded in May, mainly reflecting the continued positive base effects from last year's high inflation. Ours and the consensus expectation was slightly higher at 5.5%. To monthly headline inflation of 0.2%, core items contributed 0.3ppt, food and non-alcoholic beverages (NAB) added 0.1ppt, while fuel shaved off 0.2ppt.
Core inflation was 0.4% m/m and 5.0% y/y, down from 5.2% last month. The major contributor, explaining over half of the monthly pressure, was housing.
Fuel prices fell by 3.1% m/m, following the near R1 per litre price cut in June. Compared to a year ago, prices were in deflation, recording -8.3%.
Food and NAB inflation was 11.0% y/y, down from 11.8% previously, but monthly price pressures of 0.5% prevailed. Most of the monthly pressure was from dairy and eggs as well as sugar and desserts, which added 0.2ppt each.
Outlook
An update of our model with the June data provides a prediction of 5.1% for the next headline inflation print. While annual inflation will still benefit from base effects, monthly inflation should accelerate, supported by the July lift in utility costs as well as the continued passthrough of higher input costs and an undervalued rand. Fortunately, load-shedding has not been as severe as feared ahead of winter, and should it continue, this reprieve should at least assist in avoiding a further rise in operating costs. Furthermore, the movement in fuel prices was muted between June and July and annual deflation should remain supportive of lower headline inflation. We anticipate that headline inflation will likely average around 6.0% this year before sustainably reverting to target on a protracted basis over the forecast horizon.
Above target inflation expectations over the period to 2025, as well as funding risks related to a widening current account deficit amid tighter global financial conditions, should result in the MPC delivering another 25bps hike at their upcoming meeting.
However, the falling probability of an extended resumption of interest rate hikes in the US, the improvement in the rand since the previous MPC, slower credit demand and inflation outcomes that are now within the target range should soften any further upside risk to interest rates, allowing for a closer end to the hiking cycle. In fact, the latter could potentially justify a pause to the hiking cycle as early as tomorrow.
The July inflation print is scheduled for release on 23 August. Major periodical surveys conducted in July include municipal utilities (6.25% weight in CPI), funeral expenses and insurance (2.28%), as well as home insurance (1.15%).
