By Koketso Mano
Headline inflation lifted slightly to 3.0% y/y in December, remaining at the lower end of the inflation target band, from 2.9% in November. The print was slightly below our and the market expectation of 3.1% and 3.2%, respectively. Monthly pressure was 0.1%, reflecting slight contributions from fuel and food inflation. Headline inflation averaged 4.4% in 2024, down from 6.0% in 2023.
Core inflation had no monthly pressure and softened to 3.6% y/y from 3.7% previously. Services inflation eased to 4.2% y/y, from 4.3% previously, but had some monthly pressure that was driven by housing inflation. The deceleration in core goods inflation was stronger, as it settled at 2.3% y/y, from 2.7% in November.
Average fuel prices lifted by 1.1% m/m but were 10.2% lower than in December 2023.
Food and non-alcoholic beverages (NAB) inflation was 2.5% y/y, up from 2.3% in November. Slight monthly inflation of 0.2% was driven by meat and fruit.
Outlook
We see inflation remaining subdued in 1H25, albeit rising steadily into the second half of the year. We anticipate that headline inflation will post 3.2% in January and settle above 5% by the end of the year. This will be dictated by fading positive base effects and improving demand. Nevertheless, average inflation should be softer than in 2024. Risks to the outlook include a more robust normalisation in services inflation as well as a faster acceleration in administered price inflation.
Furthermore, less cooperative trade policy and increased defence spending would drive reflationary pressure across various parts of the globe. However, global activity should remain weak and that could contain commodity price pressures. Should the net result be inflation that is higher than expected, this would keep monetary policy tighter. As things stand, the probability of resilient growth and less interest rate cuts in the United States will have implications for the rand. That said, benign local inflation, as per the SARB's latest forecasts, should support a continued interest rate cutting cycle. We predict that interest rates will be cut to 7% by the end of 1H25, however, there is risk that we could see less cuts.
The ongoing implementation of structural reforms will remain key to the outlook on productivity and the cost of doing business. Over the medium term, an improvement in the supply side dynamics of the SA economy will support structurally lower inflation.
The January inflation print is scheduled for release on 19 February. Major periodical surveys conducted in January include funeral expenses (1.29% weight in CPI), funeral policies and home insurance (2.14%) as well as lotto tickets (1.84%).
The January release will also include new weights based on the latest Income and Expenditure survey. The indices will also be rebased to December 2024.
