Although inflation cooled in April, price embers still smouldering

Although the inflation rate cooled more than expected in April to 6.8%, the price embers are still smouldering. This was the lowest reading since May 2022, but economists still expect that the South African Reserve Bank will increase the repo rate by 50 basis points on Thursday.

However, according to economic research group, Oxford Economics Africa, the latest inflation print might give the Reserve Bank’s Monetary Policy Committee (MPC) members something to think about, as further tightening will not provide a meaningful boost to the rand and given the uncertain environment, markets will scrutinise the bank’s forward guidance.

Headline inflation for April decreased from 7.1% in March and was lower than both the group’s expectation and the consensus forecast of 7.0%. CPI increased by 0.4% in April compared to the 1.0% increase in March.

The main contributors were:

• food and non-alcoholic beverages that increased by 13.9% and contributed 2.4 percentage points;
• housing and utilities increased by 4.1% and contributed 1.0 percentage points;
• transport increased by 7.6% and contributed 1.1 percentage points;
• miscellaneous goods and services increased by 6.3% and contributed 0.9 percentage points.

“While still early days, it is likely that food price inflation peaked in March, but the latest food inflation print was still higher than we expected at +13.7% year-on-year and shows that scheduled power outages are keeping costs elevated in the food manufacturing industry.”

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Lower inflation good news

The group says it previously noted that the April inflation print will be a key factor in determining whether to revise its 5.8% average CPI inflation forecast for 2023 higher. “The lower-than-expected outcome is good news for the inflation prints to follow, with favourable base effects set to feed into more rapid disinflation from May onwards.”

However, the group points out that the rand’s sudden depreciation in early May, together with the impact of loadshedding, will add to imported inflation and keep price pressures elevated and therefore, the group expects inflation to average around 6.0% in 2023.

Oxford Economics Africa says South African forward rate agreements are pointing to further rate increases this year. “We think the market might be getting ahead of itself with headline inflation expected to fall back to within the target range over the next couple of months.”

Independent economists, Prof. Bonke Dumisa, said the lower inflation rate is good news for a change, with even food inflation easing slightly from its worst 14% in March. “I believe this must be a good reason for the MPC to effect a repo rate increase of only 25 basis points tomorrow.”

ALSO READ: More repo rate pain for South Africans expected this week

Good inflation probably peaked

The Nedbank Group Economic Unit says it forecasts inflation to continue trending lower off a higher base in the coming months. “Lower fuel prices will be the main drag as they benefit from lower crude oil prices. Food inflation has probably peaked and should also begin trending down, helped by the moderation in global food prices and higher local crop production due to favourable weather conditions.”

However, the group says, there are risks that inflation could recede at a slower pace than expected. “The biggest concern is the rand, which could remain under pressure given volatile global risk sentiment and unfavourable domestic factors, including worries about persistent load-shedding, poor growth prospects and political noises ahead of the 2024 elections that will limit the benefits of lower global commodity prices.”

ALSO READ: Food price inflation: Data shows price acceleration

Load shedding pushes up production prices

Rolling blackouts will also force companies to generate power from fuel which will push up production costs and force producers to continue passing part of the cost pressures on to consumers.

“Our base view is that the pass-through will be limited by lower consumer spending, which together with a poor growth trajectory and today’s lower inflation outcome will convince the Sarb to hike the interest rates by a smaller margin of 25 basis points, taking the prime rate to 11.5% and repo rate to 8%.”

The group added that although it is not its base view, it also thinks there is a possibility of a 50 basis points increase, given the recent sharp deterioration of the rand, which will cause the Sarb to revise their inflation forecast higher.

“We believe that tomorrow’s hike will be the last in the current cycle and will be followed by steady rates for the remainder of the year. The easing cycle is likely to begin in the first quarter of 2024.”

Adriaan Pask, CIO at PSG Wealth, says while local inflation is still above the upper limit of the Sarb’s target range of between 3% to 6%, PSG expects it to start decreasing as the Sarb hikes interest rates to combat high inflation.