24 January 2018EMEA SnapSub-Saharan Africa South AfricaEconomicsEMEA SnapDate 24 January 2018Deutsche BankMarkets ResearchSouth Africa: Uptick in inflation, but on course for lower prints to followSouth Africa December inflation up slightly to 4.7% YoYConsumer prices increased by 0.5% MoM in December, the fastest increasein three months. This takes full year average inflation to 5.3%, now within the SARBs target band of 3% - 6%, compared to 6.3% at the end of 2016. Core prices also increased at the fastest pace in three months at 0.3% MoM. Headline YoYcore inflation declined by 0.2pps to 4.2% YoY nonetheless, on the back of a higher base.In this note, we analyse the details of the December inflation print, provide anupdate on upcoming inflation dynamics and discuss implications for the Fixed Income market.Fixed Income Trade recommendation: Be long R2030 (entrance: 9.17, current: 8.88, target: 8.50, stop: 9.50)Elina RibakovaChief Economist+44-20-7547-1340Twisha RoyResearch AssociateChristian WietoskaStrategist+44-20-754-52424Deutsche Bank AG/LondonDISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 083/04/2017.Distributed on: 24/01/2018 16:42:07 GMT7T2se3r0Ot6kwoPa24 January 2018EMEA SnapSouth Africa December inflation up slightly to 4.7% YoY Consumer prices increased by 0.5% MoM in December, the fastest increasein three months. This takes full year average inflation to 5.3%, now within the SARBs target band of 3% - 6%, compared to 6.3% at the end of 2016. Core prices also increased at the fastest pace in three months at 0.3% MoM. Headline YoYcore inflation declined by 0.2pps to 4.2% YoY nonetheless, on the back of a higher base.The jump in monthly prices were driven by three main forces filtering through- increase in global oil prices have affected transportation costs, growth ineconomy-wide wages have affected some services costs and upward pressurein house prices have affected house rentals. The largest increases were postedby the following components. (i) Inflation in transport costs have gone up by1.0 pps to 1.5% MoM on the back of higher inflation in petrol prices and public transportation charges. (ii). Household maintenance costs have also increased, posting a monthly rise of 0.5% MoM (prev. -0.2% MoM). The jump has come mainly from the subcomponent domestic workers wages, as economy-wide wages are on the rise. Prices of household appliances and tableware havealso posted a solid rise. (iii) Housing costs inflation has increased by 0.4pps to 0.4% MoM, on the back of actual and implied rentals. House prices have been showing signs of upward pressure, which has fed into housing costs via rentals in December.In YoY terms, inflation in transport costs is the main driver. Inflation in transportation costs has jumped on the back of a higher monthly increase in fuel prices as well as public transport costs, increasing to 6.4% YoY in December (from4.4% YoY previously). Annual inflation in food prices have continued to decline, and have now reached a 25 month low of 4.9% YoY on the back of a higher base,despite a 0.5% monthly increase in prices. Inflation in household maintenance costs and housing costs in YoY terms have continued to decline, despite the monthly increases.Figure 1: SARB and DB inflation forecast path4.04.55.05.56.06.57.0Q1-17Q3-17Q1-18Q3-18Q1-19Q3-19ActualJan-18 forecastNov-17 forecastsDBSARB headline inflation forecastsSource: SARB, StatSA, Deutsche BankWe now expect inflation to remain 4-5.5% this year, reaching 4.6% YoY at year end.Favourable base effects are likely to drive inflation lower over the next few months. Moreover, the sharp appreciation in ZAR in December, as a result of the electionof Ramaphosa to party head boosting market sentiment, should also filter throughto lower inflation in early 2018. However, inflation pressure will increase from Q2 onwards and reach closer to 5.0% by year-end. This will take the annual averageinfl ation down to 4.8% in 2018. Upside risks to inflation from higher electricitytariffs are lower now, as the National Energy Regulator of South Africa (NERSA)has approved “only“ a 5.23% hike in electricity tariffs of Eskom in 2018, comparedto a demand for 19.9% increase in tariffs and a 2.2% actual increase in electricitytariffs this year.However, other sources of upside risks remain. In line with the details from todaysinflation data, international oil price developments, changes in housing costs andoutcome of public sector wage negotiations will continue to affect prices as well.Moreover, inflation expectations remain anchored at the upper bound of the targetcorridor of 6% and may feed into headline inflation via deferred savings. Furtherupside risk to inflation exists in the form of the possible credit rating downgrade on LC by Moodys, leading to exclusion from key bond indices and forced selling ofgovernment bonds), which will affect inflation through deterioration of the rand.Page 2Deutsche Bank AG/London24 January 2018EMEA Sna