Nedbank: Consumer Inflation

22 Feb.

Nedbank Economic Commentary: Consumer Inflation.

Consumer inflation rose more than expected in January.

• Headline consumer inflation rose to 6,3% in January, up from 6,1% in December last year and slightly above the 6,2% expected by the market.
• Over the month, retail prices rose by 0,6%, mainly due to higher food prices, which jumped by 1,5% on the back of relatively sharp increases in the prices of fruit, meat, fish, oils and fats as well as sugar and sweets. Prices of miscellaneous goods and services also rose sharply due to higher insurance premiums and financial service fees.
• Inflation is expected to hover above the Reserve Bank’s upper 6% limit for much of 2012, touching a peak of about 6,4% around the middle of the year before drifting lower towards the end of the year. Inflation will stay elevated off the low base established early last year, mainly due to persistent pressure from rising food, fuel and administrative prices. A weaker rand is likely to add to mix later in the year. These stresses will be partly offset by softer domestic spending and excess production capacity, which is likely to contain retailers’ pricing power and prevent the build-up of significant secondary inflationary effects.
• The key risks include a sharp escalation in global crude oil prices given tensions between the West and Iran over its nuclear energy programme, a sharper-than-expected drop in the value of the rand due to bouts of severe risk aversion either brought about by a chaotic or weak outcome in Europe or growing policy and political unease around the outcome of the Mangaung ANC Conference later this year. Finally, rising inflation expectations also pose a risk over the medium-term – the longer inflation remains outside the target band, the more convinced companies, labour and households become that inflation will stay above 6% or rise further.
• The Reserve Bank’s Monetary Policy Committee (MPC) continues to face the challenge of striking the right balance between supporting a fragile economy in an uncertain global environment and preventing stubbornly high inflation from becoming entrenched. With the sources of inflation still contained and limited evidence of secondary effects, the MPC is likely to maintain its accommodative stance until the local and global economies move to firmer ground. Consequently, the MPC is forecast to keep interest rates on hold at current low levels until around November this year.

Comment

Headline consumer inflation came out slightly higher than market expectations.

Over the month, prices rose by 0,6%, mainly due to higher food prices, which jumped by 1,5%, partly reflecting seasonal factors. Relatively steep increases were recorded in the prices of fruit (up 4,6%), fish (up 2,6), meat (up 1,8%), sugar and sweets (up 2,2%) and oils and fats (up 1,5%). Prices of miscellaneous goods and services added further pressure, mainly due to higher insurance premiums (up 1,4%) and financial service fees (up 2,8%). Most other categories of goods and services remained contained over the month.

Over the year, the main drivers remained largely unchanged, with food and beverages inflation at 10,7%, transport costs at 6,8%, education costs at 8,6% and electricity costs at 17,4%. Most other categories either remained steady or eased slightly over the year. …

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