Momentum Investments have released their research note titled, Headline inflation quickens, but core inflation still subdued, prepared by the Momentum Macro Research Team.
Please see below, a summary of highlights from the team, as well as a downloadable PDF of the research paper.
According to Statistics South Africa (Stats SA), headline inflation rose ahead of the Bloomberg consensus for December 2021 and surprised markets negatively at 5.9% in year-on-year (y/y) terms. The market was expecting a tamer rise from 5.5% in November 2021 to 5.7%.
The monthly rise in headline inflation topped the consensus estimate at 0.6%, relative to expectations for an increase of 0.4%. Price increases in the transport, food and housing categories were largely responsible for the monthly increase in the consumer price index (CPI).
Fuel inflation rose 40.5% y/y (19.1% on average for 2021), after factoring in a 75c/l increase in 95 petrol (inland) prices but is expected to drop into the beginning of 2022 with a 68c/l cut in the price of petrol in January 2022.
Core inflation ticked higher by 0.1% to 3.4% in December 2021, only marginally above the Bloomberg median estimate, which forecasted steady core inflation from the previous month at 3.3%. In our view, although the transport category has contributed to a rise in headline inflation, moderate domestic demand, muted currency pass through, low services inflation and modest wage pressures have helped to keep a lid on core inflation.
Only three out of the 28 inflation categories experienced inflation in excess of 6%. These categories included public transport, private transport and electricity. Half of the basket registered an inflation rate between 3% and 6% in December, which is higher than 36% recorded the month before.
Although this inflation figure likely represents the peak in headline CPI, inflation forecasts for 2022 are expected to be revised slightly higher. Together with rhetoric from the United States (US) Federal Reserve (Fed), hinting at a nearer lift-off in interest rates, we expect the South African Reserve Bank (SARB) to hike interest rates at the upcoming January 2022 Monetary Policy Committee (MPC) meeting by 25 basis points to 4%, in an attempt to keep inflation expectations anchored and to lift real interest rates, which are currently in negative territory (negative 2.2% using spot inflation).
In our view, the projected interest rate profile depicted by the forward-rate agreement (FRA) curve looks aggressive relative to our own forecasts given that core inflation remains contained on moribund local demand.
Download the full report, click below…