Picture: REUTERS
Picture: REUTERS

INFLATION continued edging higher last month, having risen most of last year, justifying the Reserve Bank’s decision to raise rates by a cumulative 50 basis points in 2015.

Data from Statistics SA due for release on Wednesday are expected to show that inflation rose significantly to 5.2% in December compared with a year ago, from 4.8% year-on-year in November.

The 5.2% is a median consensus forecast from a survey of 10 economists and is the quickest pace of acceleration in a year.

The weak rand will fuel inflation even further this year, particularly food and petrol inflation, necessitating even more rate hikes. Higher electricity tariffs will also add to inflation.

Food prices are likely to have increased by 0.3% last month after notching a 0.6% rise in November, KADD Capital economist Elize Kruger said.

Housing rentals, domestic worker wages, taxi, bus and train fares and motor vehicle insurance costs are also included in the December consumer price index (inflation) calculations and are expected to have contributed to higher inflation last month. On a year-on-year basis, comparing December last year to December 2014, food price inflation is expected to climb to 5.5% from 4.8% year-on-year in November.

A drought that has caused production shortages has led to a need for imports, which are more costly given a weak rand. This is another factor that will see food prices rising in coming months.

Citibank economist Gina Schoeman refers to the outlook for food inflation as frightful. The drought led the bank into altering its food inflation forecast to a far higher peak of 12% in the first quarter of next year.

"Concurrently, the far weaker currency is now also expected to pass through stronger than before, given that retailers find these sharp moves difficult to manage," Ms Schoeman said.

With the rand having depreciated by more than 16% since the middle of last month, the inflation outlook had deteriorated significantly, with average headline inflation now forecast at 6.1% and 7.3% this year and the next respectively, Ms Kruger said.

The Reserve Bank expects inflation to breach the upper end of the 3% to 6% target in the first quarter of this year.

Lower oil prices in the second and third quarters of this year will help keep inflation within the target, Ms Schoeman said.

Oil prices continue to maintain weak levels of about $30 a barrel, almost half last year’s levels.

Inflation will consistently breach the upper end of the target band from the fourth quarter of this year, mainly on higher grain prices, rand weakness and base effects, said Ms Schoeman.

Stats SA will also release November retail sales on Wednesday. Growth likely slowed to 2.9% year-on-year in November from 3.3% in October, according to a median consensus forecast from a survey of nine economists.

Semi-durable goods sales would likely remain the key driver of retail sales, FNB economist Alex Smith said.

"Importantly, retail sales exclude sales of vehicles and services, which have both been under significant pressure. Once one factors these items in, a much better idea of the financial health of the consumer can be attained."

Despite improved retail activity over the festive season last year, growth in retail sales is expected to slow this year in line with moderating spending growth by households.

Consumer buying power is eroded by rising inflation, interest rates, food and fuel prices. Disposable incomes will further be negatively affected by electricity tariff increases that will come into effect later this year.

Other news items that will grab the headlines are the International Monetary Fund’s January World Economic Outlook report and the World Economic Forum’s (WEF) annual meeting, which gets under way on Wednesday in Davos, Switzerland.

Although this year’s WEF theme is "mastering the fourth industrial revolution", issues of global economic growth, governance and security will be among those to be discussed.

The South African delegation, made up of cabinet ministers and business people, will be led by President Jacob Zuma.