April headline inflation surprised on the low side, printing at 4.5% y/y, below our expectations of 4.8%. Core inflation, which strips out food and non-alcoholic beverages, fuel and energy accelerated to 4.5% y/y from 4.1% the previous month.
While the impact of the hikes in the April fuel levy and sin taxes were immediately evident, the pass through of the VAT increase was more muted, suggesting that retailers have been absorbing some of the cost increases.
The 69c per litre fuel price increase in the month saw fuel inflation jump from 2.9% y/y in March to 9% in April, while higher sin taxes and the imposition of a sugar tax saw alcoholic beverage inflation climb to 6% y/y from 5.2% in March and cold beverage inflation (sugary drinks) leap to 6.1% y/y from 2.1% the month before. Stripping out the impact of these increases brings the April inflation number closer to 4.1%. Food inflation was more or less unchanged at 3.7% y/y while the meat component decelerated from 10% y/y in March to 9%. Durable goods inflation does appear to be picking up pace as demand begins to increase off a very low base.
Overall, the number paints a picture of still well contained inflation and while we do expect retailers to begin passing the higher VAT costs on to consumer over the coming months (once all their pricing systems have been updated), inflation is likely to remain around the 5% mark until the end of the year. We do, however, acknowledge the growing risk posed by a softer rand (on the back of a strong dollar) and an oil price that is hovering at the $80 per barrel mark.
The April inflation number, which printed below consensus, strengthens the case for the Reserve Bank to keep interest rates on hold at tomorrow's briefing, and we expect rates to remain flat for the balance of the year.
