South Africa's May Headline CPI to rise

In South Africa, the macro focus shifts to monetary policy as the SARB holds its July MPC meeting next week with a decision on the repo rate on Thursday afternoon. A slew of recentdata and developments pointing to firm upside risks to the inflation outlook and a weak underlying growth environment have only served to heighten the policy dilemma for MPC.

On the growth side, this week's retail sales report for May showed that underlying consumer demand remains very weak. While sales came in slightly above expectations with marginal seasonally adjusted growth of 0.1% m/m sa, the April data were revised down substantially with growth now reported as flat (0%) from a previous estimate of 0.2% m/m sa.

This of course also comes on the back of other weak activity data including mining and manufacturing output, consumer confidence and household credit extension, highlighting that the SARB is confronted with a growth environment that is challenging and faces downside risks.

"The inflation outlook will likely remain uncomfortable for the SARB as a multiquarter upside target breach looks likely from Q4, despite the recent respite in international oil prices. While the NERSA decision to decline Eskom's tariff application for this year mean has helped in the near term, this has only raised the risk that the target breach could last beyond Q2 next year if Eskom gets a steep tariff increase in July 2016", says Barclays.

This is the likely scenario. Meanwhile, upside risks to food price inflation have increased in recent months as white maize prices have risen by a further 20% since the end of May. The June CPI data, out on Wednesday next week, should provide an important read of the manifestation of the food price risk. 

"Headline CPI inflation is expected to have risen to 5.0% y/y with core CPI inflation likely to have remained unchanged at an elevated 5.7% y/y", forecasts Barclays.