Inflation of above 6% expected for 2022 and 2023 – survey

Inflation of above 6% is expected for 2022 and 2023 according to a survey of analysts, business people and trade unions, with 5.6% expected for next year. A rate of above 6% means more interest rate increases.

According to the Inflation Expectations Survey for 2022Q4, the average inflation expectations of analysts, business people and trade unions jumped from 6.5% in the third quarter to 6.6% in the fourth quarter of 2022, while expectations for 2023 increased from 5.9% to 6.1% and from 5.3% to 5.6% for 2024.

The Bureau for Economic Research (BER) at Stellenbosch University has been doing the survey since 2001 when the South African Reserve Bank (Sarb) commissioned it to conduct a quarterly survey to measure inflation expectations and other macro-economic variables related to inflation among four social groups, namely analysts, business people, senior representatives of trade unions and households.

Different groups are used because each group has a different perspective and impact on inflation, such as business people who affect prices in the real economy, while analysts affect financial markets. Trade union representatives and households, as employees, affect wage increases, which in turn significantly affects inflation.

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Inflation expectations for fourth quarter increased

All social groups revised their forecasts upwards since the last survey and the magnitude of the upward revision increased from an average of 0.1% percentage points for 2022 to 0.2% percentage points for 2023 and 0.3% percentage points for 2024. Analysts were the only exception, keeping their expectation for 2023 unchanged.

The average five-year expectations increase marginally from 5.4% in the third quarter to 5.5% in the fourth quarter, probably due to business people revising their expectations upwards from 5.6% to 6.1%.

According to the BER, after moderating from 6.5% to 5.8% in the third quarter, household inflation expectations during the next 12 months rebounded to 6.3% in the fourth quarter, while average household inflation expectations over the next 5 years remained unchanged at 8.4% in the fourth quarter.

The three social groups had different views of economic growth after 2022, with analysts expecting the economy to continue losing momentum and growth dropping to only 1.1% in 2023, while the other two groups expect growth to remain relatively close to their 2022 forecasts. Growth is expected to decelerate slightly to 2.0% in 2023.

It also seems that all three groups settled on salary and wage increases of around 6% annually for 2022 and 2023 and they did not make any significant revisions to their forecasts compared to the third quarter. Analysts expect wages to increase by 5.7% in 2023, while business people expect a higher rate of 6.1% for 2023.

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Why are these expectations important?

The BER says the results of the inflation expectations survey are one of many factors that the Monetary Policy Committee (MPC) of the Sarb considers when it decides on the interest rate.

The MPC is concerned when inflation expectations increase, are significantly above the midpoint of the inflation target range of 3% to 6% or when other inflation indicators deteriorate. Rising inflation expectations can, for example, lead to higher wage demands as workers feel they must be compensated for the higher expected inflation in future.

Businesses may also increase their prices if demand is robust enough and to prevent higher expectations from becoming a reality, the Sarb may be forced to increase the interest rate. When inflation expectations and other indicators decline, the opposite happens.

The inflation rate for December will be announced on Wednesday.