Inflation increase surprises economists

Most economists were surprised by another increase in the inflation rate in March to 7.1% as it exceeded the consensus forecast of 6.9%. However, consumers were not surprised as they continue to struggle to afford food for their families.

The main driver was food price inflation again, with the latest increase indicating a combination of sticky prices, a weak exchange rate and energy-related idiosyncrasies that do not imply the inflation rate making a U-turn. The effect of rolling blackouts on food prices cannot be underestimated.

Economic research group, Oxford Economics Africa, says annual food price inflation accelerated further, highlighting the negative impact that loadshedding exudes on food producers who are already contending with a high-cost environment.

Food and non-alcoholic beverages increased by 14.0% and contributed 2.4 percentage points, while housing and utilities increased by 4.0% and contributed 1.0 percentage point, transport increased by 8.9% and contributed 1.3 percentage points and miscellaneous goods and services increased by 5.9% and contributed 0.9 percentage points.

Core inflation that excludes volatile items such as food, non-alcoholic beverages, fuel and electricity remained unchanged at 5.2%. Goods inflation eased to 9.4%, while annual services inflation slowed to 4.6% most recently.

Goods prices are increasing by 1.0% month-on-month at a quicker rate than services which is increasing by 0.4%, probably due to the effects of rolling blackouts, the Oxford Economics Africa says.

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Higher inflation now expected

The group also notes that inflation expectations in the first quarter increased relative to the preceding quarter.

“On average, analysts, businesses and trade unions expect annual price inflation to reach 6.3% in 2023, up from the 6.1% expected in the fourth quarter of 2022. Higher inflation is also expected in 2024, relative to expectations a quarter ago.”

This will no doubt irk the South African Reserve Bank (Sarb) in its determination to re-anchor inflation expectations around the midpoint of the inflation target band at 4.5%, the group points out.

The March inflation print marks the second consecutive acceleration in South Africa’s annual inflation rate.

“Price inflation continues to run hot, fuelled primarily by food price pressures stemming from the effects of loadshedding. The impact of base effects is also set to become more pronounced from May onwards, driving down the headline rate.”

The group’s base case is for the Sarb to raise the repo rate by a further 25 basis points to 8.0% in May, with increased odds for an upward revision.

“Unless the headline rate hits the brakes in May, we will consider revising our average inflation forecast of 5.8% in 2023 back to 6.0%.”

Paul Makube, senior agricultural economist at FNB Commercial, says the latest inflation data shows no respite for consumers.

“In the food basket, the bread and cereals category still posted the highest increase of 20.3% compared to March last year, although it is below the 20.5% recorded in February.”

This again reflects the delayed passthrough of the recent moderation in grain prices at producer level, with manufactures still carrying the high cost of grain prices from 2022 due to the lag of up to five months in the passthrough to the consumer level, he says.

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Rolling blackouts exacerbates situation

Makube also points out that persistent and steep rolling blackouts in 2023 further exacerbated the situation.

“Unrelenting cost pressures emanating from load shedding will continue to maintain the stickiness in food prices in the short term, but monthly prices on domestic and international markets continue to trend on the downside recently, which has the potential to limit further increases in consumer prices in the second half of 2023.”

According to the United Nations Food and Agriculture Organization’s March 2023 update, global food inflation showed a twelfth consecutive month decrease at 2.1% compared to the previous months.

The domestic summer crop season is expected to end on a high note with a good harvest given the excellent seasonal conditions which bodes well for food inflation in the months ahead, he says

Johannes Khosa and Nicky Weimar from Nedbank’s group economic unit say the main drivers of food inflation were processed food (up 16.2%), bread and cereals (20.5%), milk, eggs and cheese (up 13.6%) and vegetables (up 20.5%).

Prices of miscellaneous goods and services decelerated to 5.9% from 6.1% yoy, with a downward momentum from slower increases in insurance and financial services prices, which outweighed the continued acceleration in personal care costs, which increased by 11.1% from 10.9%.

“Despite today’s surprising increase, we still forecast inflation to trend lower off a higher base in the second half of the year. Lower fuel prices will be the main drag as they benefit from subdued crude oil prices, which are projected to remain below $100 per barrel due to weaker global demand.”

They say food inflation remains sticky, but it is probably near its peak and it should also begin trending down during the second quarter, reflecting the lagged effect of the moderation in global food prices and favourable weather conditions.

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Increasing input costs due to rolling blackouts

However, they warn there are risks that inflation could recede at a slow pace as the price of Brent crude oil could edge higher after OPEC+ announced further production cuts from May, while the rand remains under pressure from the volatile global risk sentiment, there are further hikes in US interest rates and domestic factors, primarily power shortages and political noises ahead of the 2024 elections also affect inflation.

“Increasing input costs, mainly power generation from diesel amid persistent load-shedding, will also force producers to pass the cost pressures onto consumers,” they say.

Adriaan Pask, CIO at PSG Wealth, says higher inflation expectations and depreciating currencies continue to reinforce the pressing need for central banks to accelerate the normalisation of their policy rates, tightening global financial conditions.

“On balance, capital flow and market volatility are expected to remain elevated for emerging market assets and currencies. While the implied policy rate path of the Sarb’s quarterly projection model indicates gradual normalisation through to 2024.”