FNB Industry Note | Consumer inflation edges up at the start of 2025

Headline inflation was 3.2% y/y in January, up from 3.0% in December. The print was in line with our and the market expectation. Monthly pressure was 0.3%, led by contributions from core and food inflation.

Core inflation was 0.2% m/m, and 3.5% y/y. Services inflation eased to 4.0% y/y, from 4.2% previously, but had some monthly pressure that was driven by financial services. This is while core goods inflation lifted slightly from 2.1% y/y to 2.3%.

Average fuel prices lifted by 0.9% m/m but were 4.5% lower than in January 2024. Food and non-alcoholic beverages (NAB) inflation was 2.4% y/y, having eased from 2.5% in December. Monthly inflation of 0.4% was driven by meat, cereals and vegetables.

In accordance with international standards, Stats SA has adjusted the CPI basket. This included a reclassification of categories and application of new weights following the 2022/23 Income and Expenditure Survey of households. The index reference period has also been updated from December 2021 to December 2024. This update has added downward pressure to our forecast for 2025 inflation, as high-inflation items such as health insurance have a lower weight and low-inflation items such as communication services have a higher weight. However, volatile components such as food as well as restaurants and hotels have a higher weight, which adds volatility to the outlook.

Outlook

Inflation should remain subdued in 1H25 before rising steadily into the second half of the year. We see headline inflation posting 3.5% in February and settling above 5% by the end of the year. This will be mainly on account of fading positive base effects and improving demand. Nevertheless, we currently anticipate that average inflation will be softer than in 2024.

Risks to the outlook include a more robust normalisation in services inflation as well as a faster acceleration in administered price inflation, especially water services. In addition, any hike in the VAT rate would raise annual inflation. Furthermore, global policy uncertainty should weigh on emerging market currencies including the rand. The February inflation print is scheduled for release on 19 March. Major periodical surveys conducted in February include health services and insurance (6.98% weight in CPI).