SA consumer inflation slows to 11-month low of 6.8%, but Reserve Bank still expected to hike rates

Annual consumer inflation in South Africa braked to 6.8% in April from 7.1% in March, Stats SA said on Wednesday. This was its slowest pace since May of last year when it was 6.5%. But food prices remain red hot, the rand is on the cusp of its recent historic lows, and the South African Reserve Bank (Sarb) is still expected to hike rates again on Thursday.  

The slowdown in inflation was expected though still welcome. But especially on some fronts, this scourge remains stubbornly high despite a low growth or contracting economy and nosebleed levels of unemployment, factors which should pull it back to Earth. The combination of this trifecta of woes — slow or no economic growth, high unemployment and persistent price pressures — all adds up to stagflation, a state of economic affairs that is simply miserable.  

Food inflation on an annual basis, for example, only slowed marginally, to 14.3% from its 14-year high in March of 14.4%. The dairy and egg product basket saw price rises of 14.5%, its highest read in over 14 years. 

Vegetarians and vegans — not to mention the many omnivores who like some greens with their meat — are also getting squeezed, and the price of onions now will bring tears to the eyes of consumers.   

“On average, vegetables were 23.1% more expensive in April 2023 compared with April 2022. This is the highest annual rate since November 2007 — more than 15 years ago! Products pushing up the rate include onions (up 52.8%), carrots (up 29.8%), peppers (up 25.0%) and potatoes (up 24.4%),” Stats SA said.  

And the bread and cereals index — which contains items that are a crucial source of calories for lower-income households — is still rising by more than 20% annually. As winter sets in, the cost-of-living crisis is still sweeping a scythe across South African society, and the harvest reaped will be bitter.  

Economists do see food prices moderating in the coming months, but from such elevated levels, the pain will endure for some time.  

More widely, CPI has also remained above the Sarb’s 3% to 6% target range since May of last year. The central bank is widely expected to hike interest rates again on Thursday — not least because of the rand’s recent implosion to record lows — after its Monetary Policy Committee (MPC) wraps up its bi-monthly deliberations. 

Read more in Daily Maverick: SA Reserve Bank set to hike rates again to contain rand meltdown and fresh inflation pressures 

“We expect the MPC will hike interest rates by 50 basis points... as it seeks to add to pressure for sticky inflation to subside, with South Africa’s CPI inflation rate not expected to drop rapidly this year. South Africa’s FRA [Forward Rate Agreement] curve has virtually fully factored the larger (50 basis point) hike in,” Investec Chief Economist Annabel Bishop said in a commentary on Wednesday.  

The FRA is an agreement between parties on a rate of interest to be paid at a future date, making it a clear gauge of market expectations regarding monetary policy.  

A 50 basis point increase will take the Sarb’s key repo rate to 8.25% and the prime lending rate for consumers to 11.75%. This will be an additional burden for hard-pressed consumers to bear and the blunt tool of monetary policy can only do so much to contain inflation in South Africa’s bleak economic landscape.

The Sarb estimates that the rotational power cuts that are slashing economic growth are also adding 0.5 of a percentage point to inflation because of the additional energy costs businesses require to keep their lights on. This in some ways defies the laws of economic gravity — the choking of demand should weigh on price pressures — but the power crisis is propelling inflation into orbit. DM