South Africa CPI (May) - Capital Economics
Africa Economics

South Africa CPI (May)

Africa Data Response
Written by Virag Forizs
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South African inflation plunged to 2.1% y/y in May, which probably takes it near the trough. But even as price pressures start to pick up, the headline rate will remain very subdued, allowing the Reserve Bank to continue easing. We think that policymakers will cut the repo rate by a further 75bp, to 3.00%, in the coming months while markets expect only a 25bp cut to 3.50%.

Sharp drop in inflation to herald in further rate cuts

  • South African inflation plunged to 2.1% y/y in May, which probably takes it near the trough. But even as price pressures start to pick up, the headline rate will remain very subdued, allowing the Reserve Bank to continue easing. We think that policymakers will cut the repo rate by a further 75bp, to 3.00%, in the coming months while markets expect only a 25bp cut to 3.50%.
  • Figures released this morning showed that South African inflation tumbled from 3.0% y/y in April to 2.1% y/y in May (see Chart 1), the lowest reading since 2004. The outturn was below our own forecast of 2.4% y/y and the consensus collected by Bloomberg (of 2.2% y/y).
  • The sharp drop in the headline rate was almost entirely due to petrol inflation falling further into negative territory on the back of lower global oil prices. Price pressures eased in other categories too, although food inflation was unchanged from April, at 4.4% y/y. (See Table 1.)
  • We would interpret the breakdown of the data with some caution as South Africa’s severe lockdown measures resulted in restrictions on the ability of Stats SA to collect data, even as the lockdown eased in May compared to April. Still, prices were collected for only about a third of the CPI basket (a large portion of which consisted of food). For about a quarter of the CPI basket (mostly for products banned under the lockdown), the headline rate was used as a proxy, while prices for the remainder of the basket were not meant to be collected in May were carried forward.
  • May’s inflation reading was probably near the trough and we suspect that price pressures in June will remain subdued, allowing the Reserve Bank to continue easing monetary policy. (See here.) We expect policymakers to cut the repo rate by 50bp to 3.25% next week. In the following months, the headline rate is likely to stay around the lower bound of the Reserve Bank’s 3-6% target range, leaving space for another rate cut, to 3.00%. Markets expect the repo rate to reach a floor of 3.50%.

Chart 1: South Africa Consumer Prices & Policy Rate

Sources: Stats SA, SARB, Capital Economics

Table 1: South Africa Consumer Prices

Headline

Core

Food*

Housing

Transport

% y/y

% m/m

% y/y

% y/y

% y/y

% y/y

Feb.

4.6

1.0

3.8

4.2

4.7

6.2

Mar.

4.1

0.3

3.7

4.2

4.8

3.4

Apr.

3.0

-0.5

3.2

4.4

4.6

-3.5

May

2.1

-0.6

3.1

4.4

4.5

-8.4

Source: Stats SA (*) Includes non-alcoholic beverages


Virág Fórizs, Africa Economist, virag.forizs@capitaleconomics.com