Inflation in South Africa is now firmly poised to end the year 2022 at an elevated rate above the upper limit of the SA Reserve Bank’s (SARB) target range of 3%-6%, for the first time in six years.
This is in spite of the annual headline consumer inflation slowing for the second month in a row in September after reaching its peak in July as fuel prices declined for the second time in as many months.
Statistics South Africa (StatsSA) yesterday said that the consumer price index (CPI) eased to 7.5% in September from 7.6% in August, edging further down from the 13-year high of 7.8% recorded in July.
This means that inflation has stayed above 7% for four consecutive months since June, and for five months in a row above 6% since May, as the crippling effects of rising prices weighed in.
StatsSA said although annual food and non-alcoholic beverages inflation continued to accelerate, monthly price changes were softer in September and fuel prices had declined by 6.4% between August and September.
However, core inflation - which excludes transitory food and electricity price changes - rose to 4.7%, from 4.4% in August, and had monthly pressure of 0.5%.
Leading economists have now agreed with the South African Reserve Bank (SARB) that the average annual inflation rate would remain way above 6% for the year for the first time since 2016.
The SARB last month left unchanged at 6.5% its forecast of headline inflation for this year, also saying that the risks to the inflation outlook were assessed to the upside.
FNB senior economist Koketso Mano yesterday said that though consumer inflation would likely soften further in the coming months, volatile food and public transport prices could still cause inflationary pressures.
Mano said that headline inflation should average 6.9% in 2022, but if there were to be no further monthly pressures in the remaining months, it would average 6.7% this year.
This would be the highest average annual inflation rate since 2016 when it peaked at 6.3% amidst the El Niño drought, low growth due to weak demand at the height of political turbulence, State capture era and ratings downgrade.
Mano said for consumer prices to average below 7% for the year would require food inflation to decelerate faster than currently anticipated and core price pressures to surprise to the downside.
“Our view is that the peak in headline inflation for the current cycle was the 7.8% outcome in July,” Mano said.
“Nevertheless, a broad range of risks persist including supply disruptions from the Transnet strike, volatile international oil prices as well as lower global refinery capacity which has spillover to fuel and by-products.”
For much of this year, inflation was mainly driven by sharp increases in food and non-alcoholic beverages and fuel prices due to the ongoing war in Ukraine.
According to Investec chief economist Annabel Bishop, inflation was on course to average 6.8% year-on-year this year.
Bishop said the US has had higher inflation outcomes than South Africa since June 2021, which is an unusual phenomenon historically, due to pressure on supply chains and high freight costs.
“The unwind in generally high inflation is likely to take time, however, again due to the lagged effects mentioned for shipping costs and price inflation, and so it will take time for SA’s inflation rate to fall back below that of the US, UK and the EU,” Bishop said.
On a monthly basis, consumer prices edged up by 0.1%, lower than 0.2% recorded in August, in line with market estimates
The SARB is now expected to continue its hawkish stance with an additional rate hike in November as both the domestic and global inflation remain high.
Speaking at the Centre for Education in Economics (CEEF) Africa last month, SARB Governor Lesetja Kganyago reiterated that the bank’s immediate priority was to guide inflation back towards the middle of the target range.
Nedbank economist Johannes Khosa said they had initially pencilled in a 50 basis points rate hike in November, which would raise the repurchase rate from 6.25% to 6.75%, taking the prime rate to 10.5%.
“However, we have since revised our forecast to another 75 basis points hike given rising core inflation, the upside risks to the inflation outlook and heightened chances of more aggressive hikes by the US Fed as US inflation moderates at a slower rate,” Khosa said.
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