Inflation ceiling probably reached with 7.8% rate for July

The 7.8% inflation rate for July, which is the highest in 13 years, is probably as high as the rate will go, with food, housing, utilities and transport again the main contributors.

Price inflation is expected to remain sticky at elevated levels and is forecast to average 6.8% in 2022.

According to economic research group, Oxford Economics Africa, the inflation outcome was on par with its expectations, as well as the consensus forecast.

“Government’s temporary fuel relief measures, which came to an end at the beginning of August, smoothed the effect of high fuel costs on consumers and businesses and deferred the expected peak of inflation to the third quarter of the year.”

The group says in addition, August marked the second month in 2022 that fuel prices were lowered, with prices set to decrease further in September.

“Consequently, we believe that inflation in South Africa has neared peak levels and will taper off gradually.”

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Inflation impact on interest rate

Monetary authorities will consider lifting South Africa’s interest rates by at least another 50 basis points in September and the group expects that the South African Reserve Bank (Sarb) will continue to frontload policy tightening with the hope that more anchored inflation expectations will limit the extent to which interest rates will eventually be increased.

Independent economist, Elize Kruger, says this time the inflation rate surged to its highest level since May 2009, driven mostly by higher fuel and administered prices and to a lesser extent food prices, while more evidence of secondary effects is noted.

“Although July is considered a high survey month, the main drivers of the higher inflation rate were again fuel and food prices, contributing 0.9 of the 1.5 percentage point monthly increase. Annual increases in administered prices (electricity, water and assessment fees) added 0.4 of the 1.5 percentage point monthly increase,” she says.

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Impact of fuel increases on inflation

The hefty R2.47/l in petrol and R2.31/l in diesel increases in July contributed 0.7 of the 1.5 monthly change in the CPI basket.

“Fuel price inflation rocketed to 56.2% y/y and as South Africa is very dependent on road transport, the extent of this increase (on top of earlier increases) forced a pass-through of higher transport costs into the generally higher prices of many other items in the economy, the so-called secondary impact on inflation.”

Kruger points out that the most evident in a hefty public transport increase of 6.3% m/m in July (following on 4.3% m/m in June), is that public transport is now 22% higher compared to a year ago as higher fuel price inflation spills over into higher taxi fares.

Not surprisingly, this is hitting the low-income group particularly hard, as a big chunk of their monthly expense is on public transport. Furthermore, higher food prices are also hitting the vulnerable hard, with the category for bread and cereals increasing further, to reach 13.7% y/y, notably higher than the overall CPI print of 7.8%.

“Upward pressure on food and non-alcoholic beverage prices further added 0.2 of the 1.5 monthly change in the CPI basket in July. Food price inflation breached double digits in July, coming in at 10.1% y/y vs 9.0% y/y in June, up by a hefty 1.2% m/m, the highest food price inflation rate since January 2017 (11.7%),” she explains.

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July is administered price month too

As July is administered price month (annual increases in electricity, water and assessment fees) and usually makes for grim reading, StatsSA reported that the average increase in electricity tariffs was 7.4% y/y, but with a rather large spread.

“From a high of 9.5% in the primary urban areas of the Western Cape to the lowest increase of 2.4% in the primary urban areas of Mpumalanga, the annual average increase in water tariffs was reported at 8.0%, with the highest increase reported in the primary urban areas of Gauteng at 9.9% and the lowest increase of 2.6% in the secondary urban areas of the North-West Province.

“Assessment fee increases ranged from 1.5% in the secondary urban areas of Gauteng to 10.3% in the primary urban areas Kwazulu-Natal but averaging 4.2% for the country as a whole.”

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Inflation rate for the rest of the year

Kruger says she also believes that July’s CPI print should be the upper turning point of the current headline CPI cycle.

“Sizeable fuel price declines in August and further declines forecast for September will trigger a moderation in headline CPI. Average headline CPI for 2022 is forecast at 6.8%, the highest annual average since 2009 (7.1% average).

“For 2023, headline CPI is forecast to moderate to 5.4%, back into the Sarb’s 3-6% target range, but still a bit too high for comfort. While the Sarb should be looking forward in its assessment of monetary policy, the near term higher than expected outcomes of headline CPI will render the MPC uncomfortable and as such further increases in the repo rate are forecasted for the next two meetings.”

While the Sarb decided to follow the boldness displayed by global central banks, by hiking the repo rate by 75bps in July, it might opt to revert to 50bps increments in the next two meetings in September and November, she says.