CONSUMER inflation and retail sales data due out this week will provide important clues on the likely pace of economic growth this year.
South Africans are braced for a further rise in the consumer price index (CPI) on Wednesday after the Reserve Bank’s recent inflation forecast had a poor outlook.
The Bank’s concerns about the growing risks to inflation from the weak rand and higher food prices have begun to materialise.
Consumer inflation jumped to 5.2% year on year in December from 4.8% in November, the fastest acceleration in a year, partly because of a significant spike in food inflation.
BNP Paribas Securities expects last month’s figures to show that headline consumer inflation touched the upper 6% target band, driven partly by a further sharp rise in domestic food prices, as well as less favourable base effects in fuel prices.
The intensity of the drought has resulted in a sizeable revision to the Bank’s food price outlook. It now expects food inflation to peak at about 11% in the fourth quarter of this year.
This, and a much weaker rand assumption, caused the Bank to revise up its headline CPI forecast significantly last month.
It now expects inflation to remain at more than the 6% upper limit of the target band for the next two years, averaging 6.8% this year and 7% next year (compared to 6% and 5.8% forecast previously).
The Bank’s move to hike the repo rate by 50 basis points to 6.75% last month is viewed by many economists as the minimum response it could have mounted, given such a sustained anticipated breach of the inflation target.
"The extent of upside pressures that feed through into domestic prices over the next few months will be instrumental in guiding market expectations on the future path of policy rates," said BNP Paribas’s Jeff Schultz.
The forward rate agreement market is pricing in a further 90 basis points in interest rate hikes over the next year.
Retail sales data for December will also be released by Statistics SA on Wednesday. The expectation is that retail spending is likely to begin slowing from the 3% real average growth rate attained over the past 12 months to about 1% over the course of this year.
Retail spending was still buoyant in November, growing well above expectations at 2.5% month on month and nearly 4% year on year in real terms.
Stanlib chief economist Kevin Lings attributed the sector’s resilience to the fact that household income growth typically exceeded inflation in SA because of above-inflation wage increases in many parts of the economy.
However, Mr Lings warned that retail spending was likely to slow this year given the expectation of mounting inflation and tax increases, as well as higher interest rates and electricity and water charges.
"The critical factor that will determine whether the retail sector experiences an outright recession in 2016, as opposed to modest growth, is the performance of the labour market," Mr Lings said.
If the economy can maintain the current level of employment this should ensure that the consumer sector avoids a recession this year.
The week’s releases will be rounded out by civil cases for debt and wholesale trade sales on Thursday, while US initial jobless claims data, out on Friday, often move the rand.