South African consumer inflation accelerates in February, trajectory bodes ill for rate cuts

The consumer price index (CPI) data, unveiled on Wednesday by Statistics South Africa (Stats SA), underscored the fact that price pressures are still frothy – a point that the South African Reserve Bank (Sarb) has repeatedly made as it has held its repo rate steady at 8.25% and the prime lending rate at 11.75%. 

Headline CPI sped up to 5.6% in February from 5.3% in January on a year-on-year basis, taking it closer to the top of the Sarb’s 3%-to-6% target range. 

“Product categories that drove much of the upward momentum include housing and utilities, miscellaneous goods and services (most notably insurance), food and non-alcoholic beverages (NAB) and transport,” Stats SA said.

One silver lining was a braking of food inflation to 6.0% on an annual basis from 7.0% in January. 

But prices for some food items remain well in double digit territory. The egg shortages are largely over in time for Easter, but the inflation shock they triggered is not.

“The lingering impact of rising egg prices continues to affect the milk, eggs and cheese category, with eggs 30.7% more expensive than a year ago,” Stats SA said. 

And overall food inflation could heat up again as heatwaves and drought linked to the El Niño weather pattern scorch the grain belt.



“While food inflation should continue to soften in the near-term, we are concerned about the impact of hostile weather conditions on field crops and feed costs. This could push food inflation higher towards the middle of the year,” Koketso Mano, FNB senior economist, said in a note on the data. 

“Coupled with prevailing global trade fragmentation and any adverse developments in the rand, this could keep inflation much stickier than our projections of a temporary slowing towards the midpoint by year-end.”

Other price pressures include fuel inflation and annual increases in areas such as education.  

This will not be lost on the Sarb’s Monetary Policy Committee (MPC), which will render its next rate decision on Thursday, 28 March. Its focus is on the expected trajectory of inflation and there are still plenty of upside risks. 

“... the MPC should continue to flag upside risk to inflation and avoid communication that promotes expectations of a swift and steep fall in nominal interest rates,” Mano said. 

The Sarb’s preference is that CPI be anchored around the middle of its target range, orbiting 4.5%. That goal remains elusive, so expect the MPC to hold rates steady next week and to do so until inflation gets grounded in a range that eases the Bank’s concerns. DM