Rand biggest upside risk to SA inflation - analysts

The biggest upside risk to South Africa's inflation outlook is the rand - particularly if its recent weakness is sustained, Nedbank's group economic unit said on Wednesday.

The unit anticipates that the risk to inflation will be further compounded by the residual effects of the increase in the VAT rate, higher fuel prices and an anticipated upturn in food prices.

The unit commented on the latest consumer price inflation (CPI) data released by Statistics SA on Wednesday.

Headline consumer inflation quickened to 5.1% in July from 4.6% in June, in line with Nedbank's expectations. The main drivers of the annual figure were housing and utilities as well as transport.

Over the month consumer prices increased by 0.8%. The housing and utilities category accounted for the bulk of the increase in inflation.

"While we expect inflation to increase, we do not foresee a rise to above the SA Reserve Bank’s (SARB) 6% upper target range in the medium term. This and the still weak economy will probably convince the Monetary Policy Committee (MPC) to delay hiking rates for as long as possible," the Nedbank unit said.

"We forecast that rates will remain unchanged for the rest of this year, before rising moderately late in 2019."

Investec economist Lara Hodes estimates that there will be a long-term structural inflation rate in SA of around 5.5% year-on-year. Investec remains of the view that the SARB will commence its hiking cycle in January 2019.

"However, since the last MPC meeting in July, the effective rand has lost around 6.0% of its value. If this is sustained or worsens in the run-up to the September MPC meeting, the SARB’s tone will likely turn hawkish," she commented.

Agriculture impact

Paul Makube, senior agricultural economist at FNB Agri-Business, noted that bread and cereals inflation declined as expected as the hefty domestic supplies kept a lid on prices.

He pointed out that the vegetables component of the food basket accelerated faster largely due to the negative impact of drought on production in the Western Cape. This saw vegetable inflation increasing by 8.8% year-on-year.

The milk, eggs and cheese inflation also advanced to 4.2% year-on-year, largely due to supply constraints for eggs that kept prices elevated.

"The higher milk output helps limit the further increase in the sub-component of the food basket," he explained.

Steel industry

The Steel and Engineering Industries Federation of Southern Africa (Seifsa) weighed in on the impact of rising consumer inflation on the metals and engineering sector.

Seifsa chief economist Michael Ade said the CPI for July, which represents a third consecutive increase from May 2018, does not bode well for businesses in the broader domestic economy in general and the metals and engineering sector in particular.

This is given the fact that the increases take place on the back of weak domestic demand, increasing petrol and energy prices, a depreciating rand and less synchronised global growth.

Ade said the data was also indicative of the strain borne by businesses as increasing costs of production are gradually being passed onto the final consumer.

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