Inflation up and repo rate likely to follow, with 75 basis point hike

The inflation rate increased again today and the repo rate will probably follow suit on Thursday with an increase of 75 basis points on the eve of Black Friday, and consumers will hopefully refrain from buying on credit to avoid falling prey to the interest crunch.

Economic research group, Oxford Economics Africa, says headline inflation came in slightly hotter than expected at 7.6% in October compared to October 2021, basically dousing expectations of a 50-basis points rate increase, strengthening the group’s forecast for a 75-basis points hike.

While the group expects price inflation to remain sticky at elevated levels over the coming months, it is expected to average 6.9% in 2022, compared to last year’s with 4.5%. The new inflation rate is up slightly from the 7.5% in September.

The main contributors to the annual inflation rate were food and non-alcoholic beverages (+12.0% and contributing 2.1 ppts), housing & utilities (+4.3% and contributing 1.1 ppts), transport (+17.1% and contributing 2.4 ppts), and miscellaneous goods & services (+4.8% and contributing 0.7 ppt). Miscellaneous goods include health insurance and this increase was likely due to higher medical aid contributions for some providers.

Core inflation which excludes volatile items such as food, non-alcoholic beverages, fuel and energy, increased by 0.3 ppt to reach 5.0% compared to October 2021.

“Core prices are now at their highest level since February 2017, but the latest data also shows that goods inflation moderated from 10.7% to 10.5%, while annual services inflation accelerated by 0.3 ppt to reach 4.6% most recently.

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Price inflation will remain elevated

“While we continue to anticipate disinflationary pressures, price inflation will remain at elevated levels. The Monetary Policy Committee (MPC) of the South African Reserve Bank (SARB) has made it clear that it will need to see further evidence of slowing inflation before easing monetary policy,” the group says.

“We forecast a 75 basis points increase in the fourth quarter, followed by an additional 50 basis points increase in the first quarter of 2023, which should see the conclusion of the current hiking cycle.”

The group says depending on what happens to domestic inflation over the coming months, what the US Federal Reserve decides in December and how the rand reacts to all of this, it is possible that the repo rate might peak even higher than its current forecast of 7.5%.

“Overall, inflation is expected to average 6.9% this year, up slightly from our previous forecast of 6.8%, compared to 4.5% in 2021. Next year, South Africa’s inflation rate is forecast to be 6.0%.”

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The biggest contributors to inflation

Luigi Marinus, portfolio manager at PPS Investments, says inflation now averages 6.8% for the calendar year 2022 to date which remains above the top end of the target band, while month-on-month inflation increased by 0.4%, compared to the 0.1% increase of the previous month.

“As in the past nine months, transport was again the largest contributor, contributing 2.4% of the 7.6% increase over the year. Although it remains high, it has been declining as a proportion of total inflation as the global oil price moderated.”

On the other hand, he says, the contribution of food and non-alcoholic beverages has been increasing, with a contribution of 2.1% to inflation. Other large contributors are housing and utilities (1.1%) and miscellaneous goods and services (0.7%). As in the past few months, all 11 inflation groups saw an increase in prices year-on-year, highlighting the broad nature of the increase.

“Food and public transport, important inflation considerations for many South African consumers, increased by 12.3% and 23.3% respectively, in part as a result of the secondary effect of the 30.1% increase in fuel prices.”

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There goes the repo rate

The prime lending rate is 2.5% higher than it was a year ago and there is likely to be some disappointment that inflation has not decreased faster. “Consumers may have to accept that in a world of high inflation there is little hiding room and the balance of the decision between increasing interest rates or increasing prices is not straightforward.”

Adriaan Pask, CIO at PSG Wealth, says higher inflation expectations and depreciating currencies continue to reinforce the pressing need for central banks to increase interest rates and tighten global financial conditions.

“We will stay on the lookout for the impact of fluctuations in inflation and interest rates on shares exposed to substantial discount-rate risk over this period and we will continue to adjust our solutions accordingly.”

He also points out that despite the increase, the JSE traded higher on Wednesday morning, while the rand was little changed at R17.23/$ and R20.47/£, while it had weakened 0.23% to R17.79/€.