Consumer inflation eased to 6.3% in May
Headline inflation was 6.3% y/y in May, down from 6.8% in April, and 0.2% m/m. This outcome was the lowest in a year, reflecting the higher base that was created last year which will now support lower inflation. Ours and the consensus expectation was higher at 6.4% and 6.5%, respectively. Core items were the main contributor to monthly headline inflation.
Core inflation was 0.1% m/m and 5.2% y/y, down from 5.3% last month. Major contributions to the monthly pressure were from restaurants and hotels (0.1ppt), as well as vehicles (0.1ppt), while public transport shaved off some of the pressure (-0.1ppt).
Although fuel prices lifted by 0.4% m/m, prices were only 3.5% above May 2022 levels, indicating slower price pressures since last year.
Unfortunately, food and NAB inflation remains elevated at 11.8% y/y and prices still reflect monthly increases, rising by 0.3% m/m. Nevertheless, annual inflation is slower than the 13.9% recorded last month. Most of the monthly pressure was from cereals (0.2ppt) and dairy and eggs (0.2ppt), while mainly fruit and meat reduced some of the pressure (-0.1ppt each).
Outlook
Updating our model with this data points to an extended deceleration in headline inflation to 5.6% in June. This mostly reflects the continuation of positive base effects, while monthly inflation should continue to be driven by input cost and exchange rate pressures. Without these factors, headline inflation could have slowed faster than currently envisaged. Annual food inflation is expected to fall further, despite the likelihood that the ongoing passthrough of higher marginal costs and inflation at the ports will sustain monthly price pressures. In addition, June is a heavy periodical survey month and that should support monthly core inflation. To the contrary, fuel prices fell in June and should post annual deflation, supporting softer inflation more meaningfully. We predict average headline inflation of 6.2% this year, slower than the 6.9% recorded in 2022 but higher than the 4.7% average over the past five years.
Global inflation has broadly softened from recent highs but there are worrying signs of reflation in emerging markets. This likely reflects exchange rate pressures amid heightened risk aversion, as well as higher wage and core inflation as the cost-of-living crisis broadens and reinforces itself. The rand has recovered from its most recent lift above R19 to the dollar, but the precarious nature of geopolitical and foreign policy issues involving SA should keep the risk of sustained or further weakness elevated. Over the course of 2023, the rand has underperformed relative to many peer and commodity currencies, and its undervaluation suggests that the currency has not supported slower inflation. This, along with inflation forecasts that continue to be edged higher, should keep the MPC unsettled ahead of next month's meeting.
The June inflation print is scheduled for release on 19 July. Major periodical surveys conducted in June include housing (16.49% weight in CPI), domestic worker wages (2.53%) and transport (1.88%).
