Inflation eases in December on record fuel price cuts
A combination of a lower international oil price and a stronger rand relative led to a big decrease in the price of fuel
Inflation eased to 4.5%, the mid-point of the Reserve Bank's 3% to 6% target range, in December, aided by a steep petrol price decrease that month.
This was in line with economists polled by Bloomberg. Inflation eased from 5.2% in November 2018.
In an interview with Bloomberg TV in Davos on Tuesday, Reserve Bank governor Lesetja Kganyago said anchoring inflation at the midpoint of its 3% to 6% target range allowed the central bank the flexibility to deal with price shocks.
“We would like to see inflation and inflation expectations moving closer to the midpoint of our inflation targeting range because that gives us the flexibility we are actually looking for ... we should be flexible within the target rather than flexible outside of the target,” Kganyago told Bloomberg.
After being hard hit by fuel price increases for much of 2018, motorists welcomed a record fuel price drop of R1.84/l for petrol and R1.45/I for diesel in December. This was because of a combination of a lower international oil price and a stronger rand relative to the previous month.
Stats SA reported on Wednesday that December’s consumer price index (CPI) came in at 109.4 points, up from 104.7 in December 2017 and down from 109.6 in November 2018.
Inflation, as measured by the annual change in CPI, is the key measure used by the Reserve Bank’s monetary policy committee (MPC) to set interest rates. Last week, the MPC kept the repo rate unchanged as risks to the outlook eased slightly from the November meeting.
January inflation is also likely to show inflation moderating as more fuel cuts take hold.
Stats SA reported the food component of CPI showed inflation of 3%. Average fruit prices fell by 1.5% in December from the same month in 2017. Vegetable prices, however, rose 8.5%, according to Stats SA. Fish prices rose by 5.7% and meat by 1.8%.
Annual fuel inflation came to 8.7% compared with the previous year. Compared with November, it fell 8% in December.
The Bank lowered its inflation forecasts last week but noted risks to the inflation outlook remained moderately to the upside, citing administered prices, rising domestic food prices, changing investor sentiment towards emerging markets, a moderation in global growth, and volatile international oil prices.
Analysts expect the MPC to keep interest rates on hold for the next few meetings with any further moves being largely data-dependent.
“The counteracting forces of lower inflation forecasts, together with specific inflation risks to the upside, mean that a benign interest rate path may materialise, especially given that global central banks have hinted at fewer rate hikes going forward,” PPS Investments portfolio manager Luigi Marinus said.
Nedbank economist Busisiwe Radebe said inflation will likely remain relatively contained in 2019 on the back of softer food and fuel prices. Even if the trend lifts towards the middle of the year, inflation is expected to remain around the mid-point of the target range.
She said that this will convince the MPC to leave interest rates on hold until around November.