Consumer price inflation (CPI) in South Africa is expected to remain contained within the midpoint of the target range in the third quarter in spite of upward pressure from rising fuel prices and the impact of load shedding on food prices.
These are expectations of analysts, business people and trade unions surveyed by the Bureau for Economic Research (BER) on behalf of the South African Reserve Bank (SARB) ahead of its interest rates decision next week.
The BER yesterday said the average headline CPI inflation expectations of the surveyed individuals had started to decline significantly in the third quarter after having seemingly peaked in the second quarter of 2023.
This was the first drop in average 2023 expectations in two years.
BER economist Nicolaas van der Wath said lower expectations were also evident over the entire forecast horizon, from 2023 to 2025, and mostly due to downward revisions by business people and trade unionists by 0.6 percentage points each for all three years.
“Analysts were the exception; they virtually retained their forecast of the second quarter,” Van der Wath said.
“These revisions were done against the background where headline inflation dropped from 6.3% in May to 4.7% in July.”
The results of the inflation expectations survey are one of many factors that the SARB’s Monetary Policy Committee (MPC) considers when it decides on the interest rate.
In July, the MPC kept the interest rate unchanged at 8.25% per year as inflation slowed to 4.7%, down from 5.4% in June on account of softer food and non-alcoholic beverages prices.
However, the MPC assessed risks to the inflation outlook to the upside on account of rapidly rising global oil prices and the impact of load shedding on food prices.
BER said the MPC would be concerned if inflation expectations increased significantly above the midpoint of the inflation target range of 3-6%, and/or the other inflation indicators deteriorated.
It said rising inflation expectations might, for example, lead to higher wage demands as workers feel they need to be compensated for the higher expected inflation in future.
“Businesses may also adjust their price increases upwards if demand is robust enough.
“To prevent higher expectations from becoming a reality, the SARB may be forced to increase the interest rate, and the opposite happens if inflation expectations and other indicators decline,” it said.
According to the BER survey, the average five-year inflation expectations continued to tick down, reaching 5.1% in the third quarter, from a peak of 5.6% in the second quarter of 2022. The one-year-ahead inflation expectations of households subsided from a recent peak of 8.1% in the second quarter, to 7.0% in the third quarter, while their 5-year expectations declined from 10.7% to 9.8%.
On the economic front, the survey respondents during the third quarter of 2023, on average, forecast economic growth to be 0.8% in 2023, before rising to 1.4% in 2024.
This forecast is slightly more optimistic for this year, though similar for next year, compared to the second quarter.
On average, the three social groups expect salaries and wages to increase by 5% in 2023, and to then gain momentum to 5.4% in 2024, from the 5% they expected for both years.
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