Nedbank: Consumer Inflation

19 Oct.

Nedbank Economic Commentary: Consumer Inflation.

Consumer inflation gathers momentum in September.

• Consumer inflation came out worse than market expectations in September, increasing to 5,7 % y-o-y from 5,3 % y-o-y in August. The market expected consumer inflation to rise to 5,6 % in September.
• Over the month, prices rose by 0,4 %. An increase in housing costs as well as higher prices for services were the main contributors to the monthly increase.
• Inflation is expected to continue its upward trend in the coming months, rising off the low base established this time last year. Much depends on the direction of the global economy and how this impacts both domestic growth and the rand. Global growth is expected to slow and commodity prices are likely to moderate slightly. Subdued domestic demand will limit retailers pricing power and should help to contain inflation. However, these inhibiting forces on inflation will continue to be mitigated by higher labour costs and rising administered prices. As a result, inflation during 2012 is expected to remain relatively sticky around the higher end of the target range.
• Inflation’s steady rise towards 6 % will not cause the Reserve Bank undue concern in the short term, rather the Bank will continue to focus on how Europe’s debt crisis unfolds and what implications this may have for both inflation and growth. The Bank is likely to maintain its cautious wait-and-see approach until the global and local economic environment becomes clearer. We maintain our view of unchanged interest rates until the third quarter of 2012, but acknowledge that the possibility of a rate cut in the short term has increased.

Comment

Consumer inflation gathered momentum in September, increasing to 5,7% up from 5,3% in August. The market had expected inflation to increase to 5,6%.

Food inflation continued to pick up, increasing to 8,7% from 7,3% in September and 2,9% at the start of the year. Over the month, prices rose by 1,1%, largely due to higher prices for bread (up 0,9% m-o-m), vegetables (up 1,8% m-o-m) and fish (up 2,3%). The price of meat, sugar and sweets also increased over the month.

Rising transport costs, which make up nearly 19% of the basket, also added to inflation pressures. Inflation in this category rose to 6,6%, up from 5,9% in the previous month, largely driven by higher fuel costs, which rose by 26,2% y-o-y. Falling vehicle prices continue to act as a damper on inflation in this category, with vehicle prices falling by 0,4% over the year.

Housing costs, which are surveyed quarterly, also contributed towards the monthly rise, with owner’s equivalent rent as well as housing rentals rising by 0,7% and 0,8% over the month. However, inflation in both these categories eased off, with housing rentals slowing from 5,9% y-o-y to 4,7% y-o-y.

The price of durable goods continued to fall on an annual basis, declining by 2%, while semi-durable and non-durable goods rose by 2,2% and 9,7% respectively, both up from the previous month. Services inflation remained unchanged at 5,4%. Excluding administered prices, inflation increased slightly from 4,2% to 4,5%. …

See full Commentary