December Consumer Price Index

Consumer price inflation surprised marginally; we were expecting a 3% y/y print, while inflation rose 3.1% in December from 3.2% in November. Food and non-alcoholic beverages, housing utilities as well as miscellaneous goods and services were the main contributors to the December print. Transport detracted from headline inflation as a result of the decline in the petrol price. On a month-on-month basis inflation rose by 0.2%, led by a rise in food inflation.

Food prices rose 6.2% y/y. Most of the subcomponents rose notably, maintaining the upward momentum in food inflation that we have seen over the past couple of months. While we expect a moderation in food prices in 2H21, we remain concerned about a continued increase in food prices over the near term. Utilities rose 2.7% y/y, and actual rentals and owners’ equivalent rental (OER) increased by 1.2% and 1.1% y/y respectively. We are somewhat surprised by this outcome as we had expected an even slower rise in rentals and OER.

While we expect inflation to remain within the target band, we cannot ignore the growing risks to the inflation outlook. The rise in the oil price is a key risk to the inflation outlook, while the currency has shown some resilience recently on the back of supportive global financial conditions. However, should this change, it will not bode well for the inflation outlook. We have highlighted in our publications that we are concerned about the persistent rise in food prices over the short term, and while we do not expect escalations in the rental markets in the year ahead, marginal increases in rentals are possible. We maintain that the reserve bank has room to ease further in 1H21. However, should the risks highlighted above materialise, the bank will likely keep rates unchanged this year.

Mamello Matikinca-Ngwenya, is the FNB Chief Economist.

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