SA’s consumer inflation rate edges downwards

In August 2022, SA’s headline CPI inflation rose by a modest 0.2% m/m, helped by the lower fuel price. This follows large monthly increases in each of the preceding six months. Over the prior six months, SA’s inflation rate averaged a monthly rise of 0.9%. The more modest monthly increase in August resulted in the annual rate of inflation easing to 7.6% y/y in August, down from 7.8% in July. As mentioned last month, it seems likely that the inflation reading of 7.8% in July was the peak in inflation for the current business cycle (although clearly SA’s inflation rate is prone to dramatic changes). The August outcome was in line with market expectations (STANLIB 7.6%), and while food inflation surged to 11.5%, core inflation slowed more than expected to 4.4%, helped by a surprise moderation in a range of (largely imported) smaller categories (see discussion below).

SA’s inflation rate is still expected to remain above 7% during the remainder of 2022 (see discussion below), forcing the Reserve Bank to continue increasing interest rates. However, inflation is expected to slow meaningfully in 2023, ending the year at around 4.6%, helped largely by base effects in fuel and food inflation. This should open the door for the Reserve Bank to consider cutting interest rates late in 2023 or early 2024. In that regard, the risk of higher wages and imported inflation needs to be closely monitored.

As mentioned above, core inflation also increased by a modest 0.2% m/m in August, with the annual rate falling to 4.4%, down from 4.6% in July. The market was expecting core inflation to remain unchanged at 4.6%. The lower-than-expected increase in core inflation partly reflected a surprise decline in a number of smaller categories of inflation, including household appliances (-0.8% m/m), books/stationery (-0.4% m/m), package holidays (-0.6% m/m), and hotels (-2.3% m/m). The prices of these items rose sharply in prior months and could rise more aggressively in the months ahead, given the recent bout of currency weakness. In other words, although core inflation remains close to the midpoint of the inflation target, the risk of higher inflation broadening into a larger range of categories remains high. Consequently, the Reserve Bank cannot afford to be complacent in guarding against a broad-based deepening of inflationary pressure.

Food inflation rose by a further 1.7% m/m in August 2022, after rising by 1.2% m/m in July, 1.3% m/m in June and a massive 2.2% m/m in May. As a consequence, the annual rate of food inflation is up to 11.5%, compared with a mere 4.3% two years ago. It is, however, encouraging that agricultural inflation appears to have already peaked at just over 19%, while manufactured food inflation appears close to peaking at around 15%.

Petrol (fuel) inflation declined by a substantial -3.8% m/m in August, reflecting the R1.32/l decrease in the fuel price at the start of the month. Consequently, the annual rate of fuel inflation has moderated from a high of 53.8% y/y to 38.9% y/y. Fortunately, the petrol price fell by a further R2.04/l in September and is expected to decline by around R1/l in October. This will help to pull fuel inflation significantly lower, and if the petrol price remains contained, the annual rate of fuel inflation will fall very significantly in the first six months of 2023, helping to bring the headline consumer inflation rate back inside the target range (ie the positive impact of base effects).

For 2021, SA’s inflation rate averaged 4.5%, up from 3.3% in 2020, and 4.1% in 2019. For 2022 we now expect it will average 6.8%, (inflation is forecast to remain above 7% for the remainder of 2022 before slowing to an average of 5.6% in 2023 with a 2023 year-end rate of 4.6%). Unfortunately, the risk to inflation is still to the upside, given a range of factors, including trends in global inflation, recent increased demands for higher wages, a weaker exchange rate, the potential for a prolonged spike in agricultural and food prices, and upward pressure on administered prices. Under these circumstances, the Reserve Bank is expected to continue to increase interest rates, especially considering the risk of ‘second-round’ inflationary pressure in SA (including higher wages), as well as the broad-based rise in global interest rates.