Looking ahead, headline CPI inflation should ease in the coming months, despite this latest upside surprise, says Casey Delport, the Investment Analyst for Fixed Income at Anchor Capital.
She said this was even after the rise in Brent crude oil prices following OPEC’s announcement on cutting supply; base effects should see fuel inflation falling further in the months ahead, carrying a strong disinflationary effect. "Food inflation, in particular, should start to moderate, especially given the strong base effects. That being said, with ongoing bouts of load shedding and inflation expectations drifting higher, uncertainty around the path of CPI inflation is higher than usual.
While the in-target medium-term inflation forecasts high and restrictive forward-looking real rates, weak demand-pull inflation and even the SARB’s Quarterly Projection Model (QPM) support the case for the central bank not tightening rates further, this latest inflation overshoot will fuel the SARB’s concern about the perpetual upward inflation forecast revisions, even though they are short term in nature and with the medium-term trajectory continuing to drift around the mid-point of the SARB’s target range. Therefore, despite this latest inflation data strongly implying that demand-pull inflation pressure remains contained, it increases the likelihood of further tightening," Delport said.
The FAO Global Food Price Index (FFPI), which measures the monthly change in the international prices of a basket of food commodities, averaged 126.9 points in March this year, down 2.8 points (2.1%) from February. This marked the twelfth consecutive monthly decline since the index peaked one year ago. Moreover, during the past twelve months since March 2022, the index has fallen by as much as 20.5%. The March decline in the index was led by drops in the cereal, vegetable oil and dairy price indices, while those of sugar and meat increased.
On Friday, the Food and Agriculture Organisation of the Union Nations (FAO) will release its Global Food Price Index for April this year. This is said to be one of the most watched data releases as it provides early signals of the direction of global food price inflation.
Delport said that locally, in another upward surprise, the rate of increase for South Africa’s (SA) March headline CPI accelerated to 7.1% YoY from 7% YoY in February. She said that stubbornly high food price increases were yet again at the forefront of this latest increase, remaining upwardly sticky and contributing about one-third of the rise in the headline reading.
‘’Price growth in the food subcomponent rose at the quickest pace in fourteen years (+14.4% YoY), led by marked price increases for milk, eggs and cheese, and fruit and vegetables. However, we believe that food prices will remain a significant source of uncertainty in the coming months, given the time-varying nature of leads and lags from lower crop prices (for example, white maize futures are down about 35% from their peaks in October 2022) to shelf prices and the increasingly hard-to-quantify effects of load shedding. Furthermore, there is early evidence of mounting El Niño risks, which could generate fresh upside food pressures in 2024 if this climatic phenomenon materialises strongly towards the end of this year.’’
The analyst said that positively, the transport subcomponent, where the rate of increase slowed to 8.9% YoY amid softer (annual) price increases in fuel, helped to keep the overall rise in headline CPI more muted. Furthermore, Delport said quarterly rental inflation remained subdued, indicating that demand-pull inflation remains contained. Moreover, it is worth noting that core inflation remained stable at 5.2%, in line with market expectations.
‘’Overall, after scratching through the numbers, about half of the rise in domestic food prices is due to rand weakness, and the rest to rising domestic costs - particularly load shedding and other input costs to the agriculture production process, including transport costs. These costs, in particular, are tricky to quantify and consequently forecast. With core goods and food higher in the near term, we turn more towards the SA Reserve Bank’s (SARB’s) forecasts that headline inflation for 2023 will average around 6% this year. On a monthly basis, we will see the headline number duck back under the upper end of the target range. However, the exact timing remains the big question.’’
Recently, John Hudson, National Head for Agriculture at Nedbank, told the Business Report that they had hoped that food inflation had peaked, but given the lag in food prices, along with the negative impact of load shedding and rising interest rates, food prices had remained stubbornly high. He said the outlook for the next few months is that food prices would remain high. However, there were signs of some moderation in the second half of the year.
BUSINESS REPORT