The Namibian annual inflation rate declined slightly to 7.8% in February, 0.4% lower than the 8.2% y/y figure seen in January. Prices increased by 0.2% m/m. Annual inflation was mainly driven by housing, water, electricity and other fuel category which increased at a rate of 9.6% y/y and the food and non-alcoholic beverages category which decelerated to 11.3%, but still remains uncomfortably high. Overall, prices in two of the twelve basket categories increased at a faster rate than during the preceding month, nine at a slower rate and one grew at a steady rate. Prices for goods increased 7.5% y/y while services were 8.1% more expensive on a y/y basis.
Housing and utilities was the largest contributor to annual inflation, due to its large weighting in the basket and the effect of irregularly high rental increases of 9.7% in January. Overall the housing category increased 0.3% m/m and 9.6% y/y. This resulted in a contribution of 2.7% to the annual inflation figure. The monthly increases were driven by higher maintenance costs, which increased by 1.3% m/m and higher electricity and fuels costs which increased by 1.4% m/m. The other subcategories remained unchanged m/m, but water supply, sewerage service and refuse collection is still increasing by 11.5% y/y and electricity is now 8.3% more expensive than last February.
Food and non-alcoholic beverages, the second largest basket item, was the second largest contributor to annual inflation. Food inflation is currently running at 11.3% y/y, down from the 13.2% y/y figure seen in January. Despite the price cuts between 6% and 12% for flour and maize products announced by Namib Mills, food inflation moderated only slightly. Namib mills claimed the reduction in their prices were driven by improved rainfall over the maize production areas of southern Africa, as well as the strengthening of the Namibia dollar against the US dollar. Many of the sub-categories of food showed monthly decreases, bread and cereals prices were down 1.5% m/m, while fruits and vegetables decreased by 1.1% and 0.6% respectively. However, on an annual basis, bread and cereals prices have still increased by 10.3% y/y while fruits and vegetables are 13.0% and 4.3% more expensive. The downwards pressure on food prices should continue as the effects of a good rainy season filters through to prices.
The Alcohol and tobacco category displayed increases of 5.4% y/y and 0.3% m/m. Tobacco prices increased by 2.0% y/y, while alcohol increased at a much quicker pace at 6.3% y/y. The increases in sin taxes should put upwards pressure on alcohol and tobacco prices as the increased tariff is passed on to the consumer. Transport prices increased by 0.3% m/m and 4.7% y/y in February. Given that fuel levies are set to increase, as set out in the most recent budget, we should see further increases in fuel prices and further rises in transport inflation.
Namibian inflation is now much higher than that of South Africa, and expectations are for high inflation rates to continue in both countries. South African inflation is expected to average 6.2% in 2017, according to the SARB’s January MPC forecast. These expectations are largely driven by a weaker real effective exchange rate and the pass though effect of higher Import prices. The effect of higher food inflation due to the drought, and the pass-through effect of South African food prices on Namibia will likely cause the double digit increases in food prices to continue in the short term, although we are starting to see some of this pressure ease.
Due to expectations of high SA inflation, which remain outside of the target band for most of 2017, we will monitor the March MPC statement closely for a more hawkish SARB. However, given the low level of growth, which has been revised downwards to 1.1% in January, we do not anticipate repo rate increases in response to inflationary pressures in South Africa.
Annual inflation in Namibia averaged 6.7% in 2016, however given the surprisingly high monthly increases witnessed in January, inflation can be expected to remain quite high in 2017. The large monthly increase was driven mainly by rental increases of 9.7% m/m, the largest increase in the last 14 years. Thus, our expectation is for 2017 inflation to average 7.9%.