By Koketso Mano
Headline inflation was 3.4% y/y in September, a slight increase from 3.3% in August. The print was in line with our and the market expectation. Monthly pressure was 0.2%, driven by core inflation.
Core inflation was 0.3% m/m and 3.2% y/y, up from 3.1% previously. Services inflation recorded 0.5% m/m, supported by the latest housing data, and 3.9% y/y. Core goods inflation was -0.2% m/m and 1.6% y/y.
Average fuel prices fell by 0.3% m/m and were 2.2% lower than September last year.
Food and NAB inflation recorded 4.5% y/y, down from 5.2% previously. Monthly deflation persisted, recording 0.2% in September, which primarily reflected deflation in fresh produce that outweighed meat and cereals inflation.
Outlook
Considering this latest print, we see headline inflation lifting to 0.3% m/m and 3.8% y/y in October. This will reflect the hike in average fuel prices, which will push the year-on- year number out of deflationary territory. In addition, seasonal food price pressures could compound the upward pressure to headline inflation. That said, headline inflation should remain below 4% over the next year bar any negative shocks.
Inflation has remained benign this year, occasionally surprising the market to the downside. This has been supported by positive base effects, weak demand, and conducive import price dynamics. Going forward, we see oil prices remaining contained, the rand strengthening, and a rise in cheaper imports of consumer goods. This will keep imported inflation subdued. Furthermore, a slow recovery in the economy suggests that a still-restrictive monetary policy should constrain demand. As a result, headline inflation should oscillate around the 3.5% mark, with risks tilted downward. Exacerbating this downside risk would be government's official backing of the 3% target - verbally (moral suasion) and through the budget process. This would support current efforts by the South African Reserve Bank to guide inflation expectations lower.
The October inflation print is scheduled for release on 19 November. Major periodical surveys conducted in October include funeral expenses and policies (1.48% weight in CPI).
