Inflation increases in June

19 July 2018PwC

South Africans waiting for price relief from government

Statistics South Africa (StatsSA) reported on July 18th that consumer price inflation increased from 4.4% year-on-year (y-o-y) in May to 4.6% y-o-y in June. The latest y-o-y number is the highest reading since November last year, butin line with the median forecast surveyed amongst local economists. June’s reading is still comfortably within the South African Reserve Bank (SARB) target range of 3%-6%, though above the 4.5% y-o-y mid-point that the central bank appears to be favouring these days. The StatsSA inflation report can be viewed here.

The rise in headline inflation during June was primarily associated with faster increases in the cost of transport. Private transport operation cost 13.5% y-o-y more last month, with fuel being 16.3% y-o-y more expensive. The Gauteng price of 95 octane unleaded petrol increased by a cumulative R2.03/litre (nearly 15%) during April-June as a result of annual adjustments to relevant taxes and levies, a weaker rand exchange rate, and higher international fuel prices. More information on these factors can be found in this July 6th statement by the Ministers in the Economic Cluster.

On a positive note, food price inflation (3.1% y-o-y) remains near its lowest level since 2013. For example, sugar, sweets & desserts were on average 0.7% month-on-month and 5.3% y-o-y cheaper during June. Globally, sugar inventories are rising due to slowing demand in many markets and rising production (especially in India). This is resulting in lower sugar prices. From a demand perspective, manufacturers are buying the sweetening agent at a slower pace due to the rollout of healthier products that contain less sugar. 

Figure 1: Inflation makes U-turn after VAT increase

Sources: StatsSA, SARB

The SARB Monetary Policy Committee (MPC) is currently meeting to deliberate interest rates. At their previous meeting, the seven members of the MPC decided unanimously to keep interest rates on hold. However, policymakers flagged upside risks to the inflation outlook. It is expected that this month’s meeting will also raise concern over recent price and exchange rate developments, while the SARB will likely also revise lower its economic growth projections for 2018 following disappointing economic data released over the past two months.

MPC deliberations also come just a few days before a deadline indicated by President Cyril Ramaphosa for Ministers in the Economic Cluster to provide him with “a package of measures to ease the burden” caused by the recent rise in fuel prices as well as the 1 percentage point increase in value-added tax (VAT). However, this announcement is unlikely to happen before the independent panel of experts tasked with reviewing the list of zero-rated VAT items delivers its recommendations. The South African reported on July 18th that the National Treasury announced it expects these recommendations to be delivered only by the end of the month.