Slight decline good news for consumers, but inflation nightmare far from over

The decline in the inflation rate is good news for consumers, but inflation is expected to remain high for at least the next few months.

After reaching a fresh 13-year high of 7.8% in July, the headline inflation rate eased to 7.6% during August.

A moderation in transport inflation, thanks to fuel price decreases in August, offset a build-up in food and clothing price pressures. The CPI increased by 0.2% compared to August, compared with 1.2% compared to July.

Economic research group Oxford Economics Africa says it expects to see disinflation over the coming months, but price inflation will remain sticky at elevated levels.

“The inflation outcome was again on par with our expectations, but higher than the consensus forecast of 7.5% y-o-y.”

The main contributors to the annual inflation rate were food and non-alcoholic beverages (+11.3% and contributing 1.9 percentage points), housing and utilities (+4.0% and contributing 1.0 percentage points), transport (+21.2% and contributing 2.9 percentage points) and miscellaneous goods and services (+3.7% and contributing 0.6 percentage points).

ALSO READ:  South Africa’s inflation dips in August after drop in fuel price

Core inflation

Core inflation, which excludes volatile items such as food, non-alcoholic beverages, fuel and energy, dipped by 0.2 percentage points to reach 4.4% compared to last year in August. The latest data also shows that goods inflation moderated from 11.5% compared to 10.9% compared to last year in August, while annual services inflation quickened to 4.3%, compared to 4.2% compared to last year in July.

Oxford Economics Africa says with further reprieve from petrol prices expected in October, transport inflation should continue to moderate towards the end of the year, but elevated costs across the board mean that price inflation will remain high over the coming months.

“The headline rate is only expected to dip below the upper-end of the South African Reserve Bank’s (Sarb) target range of 3%-6% in the second quarter of next year. Overall, inflation is expected to average 6.8% this year compared to 4.5% in 2021.”

ALSO READ: Reserve Bank left with little choice but to increase repo rate again

50 basis points will be enough for repo rate

The group believes a 50 basis points increase in the repo rate would be ‘enough’ given South Africa’s inflation situation.

“Food and international oil prices have decreased in recent months and we expect disinflation going forward.”

However, the group thinks that Sarb will want to see further evidence of slowing inflation that would help to keep inflation expectations in check.

“However, hawkish pressure from the US Fed and the Rand’s recent rout imply that Sarb is more likely to hike rates by 75 basis points this round.”

The group expects Sarb will continue to frontload policy tightening and wrap up its current hiking cycle in the first quarter of next year.

Adriaan Pask, CIO at PSG Wealth, points out that the FTSE/JSE All Share Index (ALSI) fell by 0.65% to 66 169.89 points on Wednesday morning, ahead of the much anticipated Federal Reserve rate announcement, with pundits expecting a 75 basis points hike.

Mining counters including Northam Platinum, Anglo American Platinum and Sibanye Stillwater were amongst the biggest winners in morning trade, while energy counters, including Total Energies and Montauk, lagged.

“Exacerbated by the return of load shedding, the Rand fell to around R17.70 against the USD at 11:00, tracking a downward trend in riskier currencies, as a weaker outlook for global growth continues to push investors towards safer assets.”

South Africa’s 2-year government bond yield rose to 6.95%, while the 5-year and 10-year yields fell to 9.14% and 10.44%, respectively.

ALSO READ: Rand takes a dump due to US risk – load shedding set to add to its woes

Decline in inflation rate is good news, but…

Pask says while the decline in CPI is good news for consumers, higher inflation expectations, along with depreciating currencies, continue to force major 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 high for emerging market assets and currencies. Therefore, the implied policy rate path of Sarb’s quarterly projection model, given the inflation forecast, indicates gradual normalisation through to 2024.”

• Stats SA updated its CPI basket of goods and services this year to thoroughly reflect patterns in household spending, technology and consumer preferences. Following the most recent update, the CPI basket now contains 415 entries, up from 404 recorded in the last update – five years ago. New additions include consumer technologies, personal care products, alcoholic beverages and household items.