SA inflation expectation lowest in three years

Participants in an inflation expectation survey have lowered their expectations in line with the inflation rate decreasing over the past few months.

The Bureau for Economic Research (BER) conducts quarterly surveys on behalf of the South African Reserve Bank (Sarb) to measure inflation expectations and other macroeconomic variables related to inflation among analysts, business people, senior representatives of trade unions and households.

Nicolaas van der Wath, economist at the BER, says inflation expectations are now at the targeted midpoint. “From the time of the third quarter to the fourth quarter survey, reported headline inflation subsided significantly, from 4.6% in July to 2.8% in October.

“Against this background, business people especially, but also trade union officials, lowered their expectations of inflation for 2025 as well as 2026. In contrast, the outlook of analysts (which was already lower) was practically unchanged between these two quarters.”

Consequently, the combined average forecast of the three groups is that inflation will decline to 4.5% in 2025, which is 0.3 percentage points lower than the 4.8% they still anticipated in the previous survey.

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Lowest inflation expectation in three years

The last time their inflation expectations were this low was in the middle of 2021, when reported inflation was still at 4.7%, before peaking above 7% early in 2023, Van der Wath points out.

“For the next five years, the three social groups now anticipate an average of 4.6%, basically at the targeted midpoint. This is marginally lower than the 4.8% they expected before. “

The one-year-ahead inflation expectations of households fell from 6.9% in the third quarter to 6.6% in the fourth quarter. Although this is lower, it is not that much further down compared to the 6.7% expected in the first quarter of 2024, he says.

“As such, expectations practically moved sideways this year. Even more so, their five-year-ahead expectations have remained stuck around the 10% level since 2023, again dipping just below this level in the fourth quarter.”

On average, the three social groups still expect gross domestic product (GDP) growth of only 1% in 2024 and 1.5% in 2025.

The three groups now anticipate that salaries and wages will increase by 4.8% this year and by 4.9% next year. Van der Wath points out that most of this change was driven by trade unionists who lowered their forecast for next year by 0.8% percentage points to 5.1%.

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Why the inflation expectation matters

The BER uses the four different groups in the survey because each group has a different perspective and impact on inflation. For instance, business people affect prices in the real economy, while analysts affect financial markets.

In contrast, trade union representatives and households, in their role as employees, affect wage increases, which in turn have a big impact on inflation.

The Monetary Policy Committee (MPC) of the Sarb considers the results with other information when it decides on the repo rate. The MPC will be concerned if inflation expectations increase, inflation expectations are significantly above the midpoint of the inflation target range of 3% to 6% and/or the other inflation indicators deteriorate.

Increasing inflation expectations may, for example, lead to higher wage demands as workers feel they must be compensated for the higher expected inflation in future.

Businesses may also adjust their price increases upwards if demand is robust enough. To prevent higher expectations from becoming a reality, the Sarb may be forced to increase the repo rate. The opposite happens if inflation expectations and other indicators decline.

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Significant signal for the Reserve Bank

Dr Elna Moolman, Standard Bank Group’s head of South Africa macroeconomic research, says the results of the BER’s inflation expectations survey signal that there is a general expectation that inflation will remain around the midpoint of the target range, not only in the near term but also in the medium to longer term.

“This is a very important signal for the Sarb that it has succeeded in anchoring inflation expectations around the midpoint of the target range. This data clearly signals that the Sarb took the correct action at the recent meetings to start cutting interest rates. We think that this also paves the way for further interest rate cuts in 2025.”