Johannesburg - Headline inflation edged back above the upper end of the SA Reserve Bank’s target in September as retail sales growth slumped to a two-year low, dimming market bets of an interest rate cut in November.
Data released by Statistics SA showed yesterday that consumer price index (CPI) inflation quickened to 6.1 percent year on year in September, up from the 5.9 percent recorded in August.
Stat SA said the continued slowdown in retail sales, from a peak of 4 percent growth in February, also revived fears that a second quarter expansion in domestic product could be short-lived.
Retail sales in August grew the slowest since a 0.9 percent contraction in June 2014, expanding 0.2 percent year on year in August, with sales of household goods showing the largest decline.
“With spending no longer propping up growth, Africa’s largest economy may be lucky to avoid gross domestic product flattening this year,” said Paul Sirani, the chief market analyst at Xtrade.
On a month-on-month basis, prices were up 0.2 percent after a 0.1 percent contraction previously.
The main drivers of the annual inflation were food and non-alcoholic beverages, housing and utilities and miscellaneous goods.
Food price inflation remained at 11.6 percent year on year, with processed food price inflation at 11.4 percent. The rand lost its early morning gains after the data was released, and traded 0.15 percent weaker.
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Christie Viljoen, a senior economist at KPMG Investment Management, said based on the latest price data and recent comments by the National Agricultural Marketing Council, it was possible that food prices could peak in the third quarter.
“According to the Food and Agricultural Organisation, wholesale maize prices have declined by 20 percent from record highs seen at the start of the year,” Viljoen said. “Nonetheless, agriculture experts anticipate a 10 percent to 15 percent increase in red meat prices towards year-end, as farmers reduce drought-forced slaughtering and start to rebuild their herds.”
In September, the Reserve Bank kept lending rates unchanged at 7 percent for a third consecutive time in 2016, and also hinted that it might have reached the end of its tightening cycle.
The bank cited the weak economic growth outlook as a counter balance to persistently high inflation, which it saw averaging 6.4 percent this year, outside its target of between 3 to 6 percent.
“While the inflation print is better than we expected, we doubt it will make much difference to the SA Reserve Bank,” Africa analyst at Standard Charted Bank Razia Khan said in a note, adding that base-related pressures on the headline number looked set to continue.
“Even if this is not as bad as the SA Reserve Bank initially expected, the likelihood of a VAT increase at some point will keep the bank on hold for an extended period.”
Jason Muscat, FNB senior industry analyst, said he remained of the view that inflation would nudge higher in the coming months, but should dip into the target range in the first quarter of 2017.
“To be sure, there are still many risks that could derail this outlook, among them a higher oil price, any currency blow-outs on domestic political noise, and insufficient rainfall that would jeopardise crop yields.”
Stats SA announced in September that it would make changes to the CPI basket of goods and services, and the weights attached to these, with effect from the January 2017 release of the CPI.
It said the period since the last weight and basket update in 2013 was within the international best-practice convention of five years.
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