July 2021 Inflation – Low Base Effects Dissipating

The July 2021 Consumer Price Inflation (CPI) figures were largely in line with surveyed expectations. Please see below the latest prints:

• Headline CPI m/m up 1.1% (median expectations: +1.1%) vs. prev. 0.2% m/m
• Headline CPI y/y up 4.6% (median expectations: +4.7%) vs. prev. 4.9% y/y
• Core CPI m/m up 0.5% (median expectations: +0.5%) vs. prev. 0.3% m/m
• Core CPI y/y up 3.0% (median expectations: +3.2%) vs. prev. 3.2% y/y

Low base effects from a year ago are naturally starting to dissipate. A weak economic backdrop is still muting core inflation recovery. The primary drivers behind the monthly rise were alcoholic beverages, housing & utilities, transport and medical insurance.
 
Fuel prices increased by 1,7% between June and July. This took the annual rate to 15,2%, down from June’s reading of 27,5%. The global oil market was therefore no longer in contagion as of July 2020, contributing to this largely expected CPI turning point.
 
There was nothing material from these numbers to change the short-term interest rate outlook. The amended implied policy path of the SARB’s Quarterly Projection Model (QPM) now indicates a repo rate increase of 25 bps in 2021q4 and in each quarter of 2022. While the SARB may withstand negative real short-term interest rates over the near-term, an accommodative encroachment towards positive territory is still essential in mitigating passthrough and improving the outlook for net domestic savings.
 
To this end, we still expect no room for further monetary easing, with the SARB likely to embark on a gradual hiking cycle in the interest of a sustainable economic recovery. The Forward Rate Agreement (FRA) market is of a similar view, pricing in a steadier lift-off of a 25 bps hike only in the first quarter of 2022. The risk is that should the fiscal outlook further deteriorate, and we have persistent currency weakness, the SARB may need to consider a more aggressive hiking pace.
 
SA CPI YoY vs. SARB repo