Annual inflation continues to descend further since the start of the year, falling to 5.4 % y/y in July, 0.7% lower than in June. On a month-on-month basis prices remained flat. The slowdown in annual inflation was largely due to a decline in transport prices. Overall, prices in two basket categories rose at a faster annual rate than during the preceding month, eight at a slower rate and two grew at a steady pace. Prices for goods rose by 3.5% y/y while prices for services rose by 8.1% y/y.
The largest contributor to annual inflation remains Housing and utilities due to its large weighting in the basket. This category rose by 0.3% m/m and 9.1% y/y. January 2017 saw an irregular high rental increase of 9.7%. Annual inflation for rental payments for dwellings remained unchanged at 9.6% in July and will likely remain this high for the rest of the year. The effect of the tariff increases passed on by the City of Windhoek have seen prices of water supply rise by 6.6%. Furthermore, the City of Windhoek has requested for a 10% electricity tariff increase submitted to the Electricity Control Board (ECB) pending approval. Should approval be granted, this should see price levels ticking up. We continue to expect the housing and utilities basket category to underpin overall inflation.
Food and non-alcoholic beverages was the second largest contributor to annual inflation and serves as the second largest basket item in weighting, accounting for 0.8% of the total inflation figure. Prices in this category rose by 4.3% y/y while three subcategories became cheaper, such as bread and cereal prices which declined by 0.6% y/y.
Alcoholic beverages and tobacco prices rose by 3.6% y/y and 0.3% m/m in July compared to 3.0% y/y in June. Alcohol prices have been the predominant driver within this category. However, that role reversed in July with tobacco prices rising by 6.2% y/y while alcohol prices rose 3.0% y/y. Transport, miscellaneous and education individually accounted for 0.3% of the total 5.4% inflation recorded in July. Transport prices increased by 2.4% y/y and fell 1.0% m/m as the cost of vehicles subcategory rose by 0.5% m/m but the cost of operating personal transportation equipment decreased by 1.8% during the month, muting overall inflation for the transport basket category.
Slower increases in food prices since the start of the year have been a large contributor towards the slowdown in annual inflation. Transport prices being the third largest basket category had a significant impact on the downtrend in annual inflation. The Rand took a knock following the failed motion of no confidence against president Jacob Zuma, but fears of further immediate downgrades were squashed when S&P stated that the failed motion did not have ruling on any downgrade scenario. With the SARB having cut monetary policy rates in a bid to support growth and SA inflation returning to within the target band, inflation seems set to remain within these levels. However, it remains to be seen whether the currency will deteriorate further.