Inflation rate dips, but food prices keep rising and SA tightens belts

Although South Africa’s headline inflation rate cooled in November, dipping by 0.2 percentage points to 7.4% compared to last year, food price inflation accelerated for the seventh month in a row, while transport recorded its fourth consecutive month of disinflation.

The three categories with the highest annual inflation rates in November were transport (15,3%), food and non-alcoholic beverages (12,5% from 12,0% in October) and hotels and restaurants (7,9%). The main driver for the increase in food and non-alcoholic beverages was inflation in bread and cereals, which reached an annual rate of 19,9% in November, up from 19,5% in October, notably higher than the modest 2,3% recorded in November 2021.

A 2,5kg bag of maize meal cost an average of R34,08 in November, up from R33,82 in October and R25,591 more than 12 months ago and on average the price of a loaf of white bread increased to R18,68 in November from R18,54 in October, while it was R15,68 a year ago.

The annual rate for meat was 10,5% in November, unchanged from October, with bacon increasing by 6,4% from October and other pork products by 1,9%. Milk, eggs and cheese cost 10,9% more than 12 months ago, while the annual rate of change for the oils and fats index declined for the third consecutive month, from 25,7% in October to 24,8%. The average price of a 750ml bottle of sunflower oil was R38,12 in November after reaching a peak of R45,33 in July.

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Inflation slightly weaker than expected

Economic research group, Oxford Economics Africa, says the decrease in the inflation outcome was only slightly weaker than its expectation and the consensus forecast of 7.5% compared to last year.

Housing and utilities (+4.3% and contributing 1.1 percentage points), transport (+15.3% and contributing 2.2 percentage points) and miscellaneous goods and services (+4.8% and contributing 0.7 percentage points) were other main contributors to the inflation rate.

Core inflation, which excludes volatile items such as food, non-alcoholic beverages, fuel and energy, was flat at 5.0% compared to last year, while the data also shows that goods inflation moderated from 10.5% compared to last year to 10.4% y-o-y in November, while annual services inflation decelerated by 0.1 percentage points to reach 4.5% most recently.

The group says further disinflation should see South Africa’s inflation rate average at 6.9% this year, although a lower reading is more plausible than a higher one, compared to 4.5% in 2021.

“Next year, the average headline inflation rate is forecast to be 6.0%. We maintain the notion that price inflation will stay at elevated levels but come down gradually over the coming months. The South African Reserve Bank has said that it remains committed to stabilising inflation expectations more firmly around the midpoint of the inflation target band at 4.5%.”

The group, therefore, forecasts an additional 50 basis points increase in the repo rate in the first quarter of 2023, which will see the repo rate reach 7.5%. “South Africa should once again have a positive real interest rate in the first quarter of next year.”

ALSO READ: Consumers must brace for more rate hikes until meaningful inflation decline

Spending reluctance continues

Retail sales data also continued to underwhelm in October as consumers feel the pinch of high living costs, with seasonally adjusted retail trade sales inching up by 0.4% in October compared to September when it only increased by 0.2%. Retail trade sales dropped by 0.6% on an annual basis, the second decrease in a row.

The softer increase translated into a 0.6% decrease compared to 12 months ago, slightly weaker than the consensus expectation of a 0.4% drop. Oxford Economics Africa says it noted that the impact of elevated inflation and higher interest rates is eroding purchasing power as households are squeezed.

This was evident in the data for hardware stores (-4.8%), pharmacies (-3.4%) and food, beverages and tobacco in specialised stores (-2.3%). Third-quarter national accounts data revealed that household finances are strained and the October retail sales numbers marked the second-straight annual decline.

ALSO READ: Consumer confidence increases again, but no great outlook for 2023

Negative outlook for economy

The group says in addition, the consumer confidence index (CCI) survey for October showed that although households expect to see an improvement in their finances over the next 12 months, negative perceptions about the economic outlook imply that the majority of South Africans still anticipate diminishing economic prospects and consider the present time as inappropriate to buy durable goods.

“Retail sales numbers are expected to be higher in November, boosted by increased buying activity as consumers delayed purchases in anticipation of so-called Black Friday deals. That said, the high-cost environment means that shoppers likely favoured non-durable household goods.

“We believe consumers will continue to feel the squeeze of high living costs after the South African Reserve Bank hiked interest rates by 75 basis points in November, with more interest rate hikes expected in early 2023,” the group says.