South Africa Inflation and Central Bank Outlook

Consumer price inflation in December was a higher-than-expected 6.8% yoy. Our expectation had been 6.5%, the same as the median consensus estimate. In November that rate was 6.6%. The average for 4Q 2016 was 6.6%; the highest of the year. Core inflation in December also jumped, to 5.9% from 5.7%, according to data published yesterday by Statistics South Africa. Numerous components of CPI were higher than our estimates, in particular:

? ‘Food and non-alcoholic beverage’ prices (15.4% of CPI) were up 0.8% mom; and

? ‘Housing and utilities’ prices (24.5% of CPI) were up 1.0% mom; Some core inflation items also surprised on the upside:

? ‘Alcoholic beverages and tobacco’ prices (5.4% of CPI);

? ‘Household contents and equipment’ prices (4.8% of CPI;

? ‘Recreation and culture’ prices (4.1% of CPI); and

? ‘Restaurant and hotels’ prices (3.5% of CPI).

The profile of the jump in inflation in December would support a continued cautious approach to monetary policy, in our view. Inflation looks likely to remain elevated for some time still, before the benefits of the recent decline in domestic agricultural prices begin to filter through. We still expect that inflation will decline through the year, but a sustainable return within the inflation target range of 3%-6% is only likely towards the end of 2017, according to our estimates.

Our estimates for CPI inflation assume a USDZAR rate of 15.25 at the end of 2017, and a Brent oil price of $60/bbl. by year-end (. We think that the Reserve Bank’s monetary policy committee will hold the repo policy interest rate at 7.00% throughout 2017. Retail trade data published yesterday showed that sales in November were up a very strong 3.5% mom, in seasonally adjusted and constant price terms. We will comment more fully on the domestic trade sector after the publication today of some additional data.