CPI | Positive inflation surprise could strengthen support for a smaller rate rise

Herman van Papendorp, Head of Investment Research & Asset Allocation, Tshiamo Masike, Economic Analyst at Momentum Investments and Sanisha Packirisamy, Economist at Momentum Investments

Momentum Investments have released their report based on ‘CPI | Positive inflation surprise could strengthen support for a smaller rate rise’ prepared by the Momentum Macro Research Team.

Below, is a summary of highlights from the team, as well as a downloadable PDF of the research paper.

Highlights

• Statistics South Africa (Stats SA) reported headline inflation (CPI) at 7.2% year-on-year (y/y) for December 2022, a welcome drop from 7.4% y/y in November.
  The December outcome was in line with the median Reuters consensus of 7.2% y/y.
  The main contributors to headline inflation were food and non-alcoholic beverages (NAB), housing and utilities, transport and miscellaneous goods and services.
  Core inflation was reported at 4.9% y/y in December, lower than the November print of 5%. This is a positive surprise relative to the Reuters median consensus of 5.1%.
  On an annual average basis, headline inflation for 2022 breached the upper limit of the SA Reserve Bank’s (SARB) inflation target range at 6.9% while core inflation averaged below the midpoint of the target band at 4.3%. This was in line with our projections of 6.9% and 4.3%, respectively.
  Persistently high inflation in 2022 disproportionately impacted vulnerable consumers. Households in expenditure deciles 1 and 2[1] experienced inflation rates of 8.5% and 8.1%, respectively, in 2022.
  The global diesel crisis resulted in diesel prices being 44% higher than in 2021, which explains why transport inflation featured as a strong driver of inflation last year. However, transport inflation has been decelerating since the peak in July due to lower international oil prices.
  Despite a further decrease in the price of Brent crude oil to US$81/bbl in December 2022, petrol prices (inland 95) increased by 59c/l in December, but the Central Energy Fund (CEF) announced a significant decrease of R2.06/l for January 2023.
  Food and NAB replaced transport as the largest contributor to inflation in December. However, food inflation is showing signs of having peaked in November 2022.
  The approved increase of 18.65% in the electricity tariff announced by the National Energy Regulator of SA (Nersa) for the 2023/2024 financial year followed by an increase of 12.74% in the next financial year is expected to impact inflation between 0.1% and 0.2% given the 3.7% weight of electricity in the consumer basket. Moreover, it is expected to feed into inflation expectations, which came in higher across all time horizons surveyed in December 2022.
  Although we had initially anticipated an interest rate increase of 50 basis points at this month’s Monetary Policy Committee (MPC) meeting, the downward surprise in headline and underlying inflation, subdued services inflation and signs of easing global inflation point to a strengthened case for a small rate rise of 25 basis points at the upcoming meeting. We expect the current interest rate hiking cycle to peak at 7.5% by the end of the first quarter, given that real interest rates, based on forward-looking inflation, are already in positive territory.

Download the full report in PDF – Click below

ENDS