South Africa: CPI growth at 4.6% y/y almost touches target untying MPC’s hands

• July print is lower than consensus market expectations
• Fuel and food prices continue to drive the moderation, backed by higher base last year
• Increase in water and electricity prices drives acceleration in housing and utilities
• Housing and utilities is the largest contributor to inflation in July
• The MPC may opt for a larger 50bps rate cut in September, backed by firm rand, lower oil prices and potential cut in the US

Consumer price inflation decelerated to 4.6% y/y in July from 5.1% y/y in June, the data released by StatisticsSA published on Wednesday (Aug 21) indicated. The rate is only 0.1ppt above the SARB's inflation target and will untie the hands of the MPC to start cutting the main policy rate at the next sitting in September. We expect to see inflation decelerate further in August and especially in September and October, which may persuade the MPC members to implement a larger 50bps cut. Deceleration will pick the pace in the next several months as a result of a decline in oil prices and the appreciation of the rand on top of continued easing in food inflation. The July CPI print is a positive surprise against consensus market projections (Bloomberg) for a rate of 4.8% y/y. The core inflation print at 4.3% y/y in July, down from 4.5% y/y in June as well as the expected easing inflation expectations in Q3, are additional factors likely to push the MPC's hand in September.

Consumer prices rose 0.4% m/m in July, accelerating from 0.1% m/m in the preceding month, suggesting that headline easing was supported by the higher base last year. Base effects will continue to be at play and drive the CPI rate lower until the end of the year.

In a short-term comparison, most of the breakdown remained benign in July with price changes showing very subdued growth or declines in three categories. This was more than offset by the 2.6% m/m rise in housing and utilities prices due to municipalities adjusting water and electricity charges in the new budget year starting in July. Water tariffs increased by 4.8% m/m and electricity charges were hiked 11% m/m. In annual terms, the water price index rose 8.0% and the electricity price index by 12.1%. The housing and utilities price category remained the largest contributor to headline CPI growth in July. Housing and utilities prices rose 5.3% y/y in July, contributing 1.3pps to the headline growth rate. The stats office data also show overall administered price inflation excluding fuels at a steep 8.0% y/y rate in July, well above the headline rate and clearly out of line with the target rate. High administered price inflation is one of the structural factors supporting high inflation in South Africa and the central bank which the central bank has long been concerned about.

On the positives side, however, lower fuel prices and the continued easing in food prices as well as the higher base from last year supported the moderation in the headline CPI growth rate. Food and NAB prices were flat m/m and rose 4.5% y/y, inching down from June. The fuel (petrol) price index was down 3.6% m/m (-4.6% m/m in June) and increased at a rate of 4.5% y/y in July from 7.6% y/y in June. This helped the reduction of the contribution of transport prices to 0.6pps in July from 0.8pps in June. Fuel prices were the major downside driver in July. This is likely to remain the case in August when we expect to see the fuel price cutting 0.2pps from headline CPI growth.

Overall, the scope for the headline CPI print is to undershoot the 4.8% rate projected by the central bank for the third quarter and arrive at 4.3% in our estimates, thanks to a strong rand appreciation and a decline in oil prices. Considering that two MPC members already voted for a 25bps cut in July and the likelihood that the Fed starts to ease its stance in September, the MPC could decide to provide a larger relief of 50bps at its September meeting.