Herman van Papendorp, Tshiamo Masike, and Sanisha Packirisamy of Momentum Investments

Momentum Investments have released their report based on “Inflation spike reverses in November 2023” prepared by the Momentum Investments Macro Research Team.

Please see below, a summary of highlights from the team, as well as the full research note attached.

Highlights

• According to Statistics South Africa (Stats SA), headline inflation (CPI) decelerated to 5.5% year-on-year (y/y) in November 2023 from 5.9% y/y in October, positively surprising the market’s expectation (Reuters median consensus) of 5.6% y/y.

• Core inflation ticked up slightly to 4.5% y/y in November against the Reuters median consensus expectation of 4.4% y/y (unchanged from the previous month).

• The drop in fuel prices during November is the main reason for the softer inflation figure. Further price decreases announced in December will provide additional reprieve for the December inflation figure. Transport inflation decelerated to 4.3% y/y in November from 7.4% y/y in October. According to early data from the Central Energy Fund (CEF), we can expect fuel price cuts in January 2024 of R0.78/l for petrol (inland, 95) and R1.40/l for diesel (inland, 0.05%). Nevertheless, recent rand weakness could reduce the size of these cuts.

• International oil prices have been a bigger driver of lower fuel prices in the past two months despite ongoing conflict in the Middle East. According to the United States (US) Energy Information Administration (EIA), the average price of Brent crude oil decreased to US$82.9/bbl in November. This represents a 11.5% drop since the recent peak in September 2023.

• Upward price pressure on Brent crude oil prices is expected in the first quarter of 2024 on the back of additional Organisation of the Petroleum Exporting Countries Plus (OPEC+) oil production cuts announced in November 2023.

• Producer price inflation (PPI) for food products edged up to 5.5% y/y in October (4.5% y/y in September) which signals upward pressure on consumer food inflation. In November, domestic food inflation on a consumer level accelerated for the second month to 9% y/y from 8.8% y/y in October.

• There are upside risks to food price inflation in 2024 namely, geopolitical tensions, El Niño and loadshedding. However, the SA Reserve Bank (SARB) expects food inflation to moderate markedly to 5.5% (revised up) in 2024 from an upwardly revised 10.6% in 2023. This is likely on the back of high base effects, good soil moisture and better planting intentions.

• Recent trends in the inflation rate experienced by pensioners suggest that pensioners are more vulnerable to elevated food inflation. There is uncertainty about the initial inflationary impact of the two-pot retirement system set to be implemented on 1 September 2024. If the long-term objective of improving retirement savings is achieved, pensioners could become less vulnerable to inflationary shocks.

• With November’s inflation figure surprising positively and the expectation of a further deceleration in December, we do not foresee major deviations from the SARB’s estimate of inflation averaging 5.8% in 2023 (broadly in line macro research and asset allocation | cpi | 13 December 2023 Page 2 of 6 with our estimate of 5.9%). Nevertheless, risks to the inflation trajectory remain and inflation expectations are still elevated. As such, we expect the SARB to keep the repo rate constant at 8.25% in the January 2024 interest rate-setting meeting. We maintain our view that the SARB will likely implement the first interest rate cut in the second quarter of 2024.

Open / Download the full report – click below…

ENDS