Concern that food inflation is still too high

Although the inflation rate decreased somewhat in November, there is still concern that food inflation remains high. Headline inflation eased to 5.5% in November from 5.9% in October, backing away from the upper end of the South African Reserve Bank’s target band for inflation of 3% to 6%.

Jee-A van der Linde, senior economist at Oxford Economics Africa, says the decrease in inflation was more than expected, driven by the drop in transport inflation. “However, price pressures lingered with core price inflation increasing to 4.5% year-on-year. Our forecast shows that headline inflation is likely to hover around the upper end of the inflation target band next year.”

Oxford Economics Africa expected inflation to moderate to 5.7%, while the consensus forecast was 5.6%.

Annual food price inflation increased by 0.3 percentage points in November, while transport inflation dropped by 3.1 percentage points. Even so, Van der Linde says, the main contributors to the annual inflation rate were food and non-alcoholic beverages, housing and utilities and miscellaneous goods and services.

“Headline inflation will likely end up averaging 5.9% in 2023, but we believe price inflation will remain elevated at an average of 5.3% in 2024. The deceleration in goods inflation during November was due to fuel price cuts, but prices more generally remain elevated, driven by supply side factors, while lower services inflation points to soft demand.”

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Food inflation and a stagnant economy

As such, he says, the recent uptick in core price inflation is somewhat disquieting considering that the South African economy has stagnated since the pandemic slump. “Although December fuel price cuts will provide welcome relief, price pressures remain prevalent elsewhere throughout the economy.”

He also points out that Reserve Bank (SARB) governor Lesetja Kganyago recently said that lower core price inflation would suggest that price pressures have not flared up widely and that the overall inflation trajectory remains within the Sarb’s target.

“While the Sarb still sees serious upside risks to inflation, monetary policy is deemed restrictive enough given the bank’s current outlook. We expect interest rate cuts to start coming through from the second half of 2024 as the Sarb is unlikely to move ahead of the US Fed, which we currently forecast will cut rates by the third quarter of next year only.”

Van der Linde says with underlying US inflation set to trend gradually lower next year, they expect Fed officials to push back hard on market expectations that rate cuts could come earlier.

The economists at the Nedbank Group Economic Unit say they expect inflation to ease further in December, ending the year at 5.3%, again reflecting stable global oil prices and a firmer rand, which will translate into lower petrol prices.

“Food prices will also start to ease as the impact of the temporary supply shocks in the poultry industry fade. We forecast inflation to hover between 5% and 5.5% in the first half of next year before falling more convincingly towards the midpoint of Sarb’s target range during the third quarter and averaging 5% in 2024.”

However, they say, the risks to their forecasts reside marginally to the upside due to the uncertainties surrounding the outlook for oil prices, food prices and the rand. “We believe sluggish domestic demand will offset these risks and convince the Sarb to start easing interest rates from May onwards, with four reductions totalling 100 basis points, taking the repo rate to 7.25% at the end of 2024.”