By Koketso Mano
Headline inflation lifted slightly to 2.9% y/y in November, from 2.8% in October, but remains below the 3% lower end of the inflation target band. The print was below our and the market expectation of 3.2% and 3.1%, respectively. There was no monthly pressure as a slight contribution from fuel was outweighed by food deflation.
Core inflation also had no monthly pressure and softened to 3.7% y/y from 3.9% previously. Services inflation eased to 4.3% y/y, from 4.4% previously, while core goods inflation slowed to 2.7% y/y, from 3.0% in October.
Average fuel prices lifted by 0.9% m/m but were 13.6% lower than in November 2023.
Food and non-alcoholic beverages (NAB) inflation was 2.3% y/y, down from 3.6% in October. Monthly deflation of 0.4% was driven by vegetables, cereals, as well as dairy and eggs. Negative contributions from 60% of the food and NAB basket were mitigated by fruit inflation.
Outlook
We see inflation remaining around 3.0% in December, with monthly pressure driven by higher fuel prices and, potentially, core inflation with a new survey outcome on housing costs. Food inflation could remain subdued.
We expect headline inflation to continue rising steadily into 2025, but we do not expect it to surpass 4.0% until the turn of the year. Risks to the outlook include a more robust normalisation in services inflation, starting with medical insurance in February and followed by other services that would be supported by improving domestic demand.
Growing trade restrictions and geopolitical tensions would also drive reflationary pressure across various parts of the globe and keep monetary policy tighter than currently anticipated. This risk-laden environment and monetary policy recalibration in countries such as the United States would weigh on emerging market currencies. A weaker rand will have implications for imported and goods inflation.
The risk of higher global inflation and tighter financial conditions will not only have implications for the outlook on South Africa's inflation but will filter through to monetary policy. The South African Reserve Bank is expected to cut interest rates by 25bps at each meeting until May 2025. While risks may not unfold quickly enough to challenge this view, they will keep the Monetary Policy Committee cautious. An accelerated unfolding of these risks may result in the cutting cycle ending prematurely.
The December inflation print is scheduled for release on 22 January. Major periodical surveys conducted in December include housing (16.49% weight in CPI), domestic worker wages (2.53%), and transport (1.88%).
