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South African annual average inflation slips to 4.6% in 2015

South African annual average inflation slips to 4.6% in 2015

South Africa’s annual average inflation slipped to 4.6% in 2015 from 6.1% in 2014 as the impact of lower oil prices outweighed the effects of a weaker rand.

The December 2015 inflation rate edged up to 5.2% year-on-year (y/y) from 4.8% y/y in November. The momentum of consumer inflation as measured by the quarterly annualised rate eased to 1.6% in December from 2.2% in November and the 2015 peak of 10.3% in May.

The sharply weaker rand after the firing of Finance Minister Nhlanhla Nene on 9 December 2015 and the impact of the drought on food prices is however likely to push inflation above the 6% inflation target of the South African Reserve Bank, which is why most economists are expecting the repo rate to be raised next week when the Monetary Policy Committee meets.

So far the impact of the weaker rand has been muted as most importers cover at least six months forward, so many are still importing at exchange rates below R13 per US dollar rather than the current R16.90 per US dollar. In addition, many maize processors covered their 2016 needs in September 2015 at a time when the white maize July 2016 futures price was near R3,200 per ton rather than the current R5,000. The South African Weather Service had been warning for some time that a drought would be expected in 2015 and 2016 due to the el Nino weather effect.

Food inflation therefore remains muted at 5.8% y/y in December from 4.8% y/y in November and the 2015 peak of 6.6% y/y in January. Unprocessed food prices jumped to 6.2% y/y in December after being steady at 4.6% y/y in November and October, while processed food prices rose to 5.6% y/y in December from 5.0% y/y in November. Meat prices increased by 4.1% y/y in December as farmers reduced their herds to cope with the drought, while edible oils and fats surged by 14.1% y/y in December.

Core inflation, which excludes volatile components such as food, petrol and municipal rates, rose to 5.6% y/y in December from 5.1% y/y in November, while the new core measure, the trimmed mean, which excludes volatile components irrespective of category and is in line with international best practice, increased to 4.9% y/y in December after being steady at 4.5% y/y in November and October.

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