SA consumer inflation slows to 7.6%, but August data will not stave off Reserve Bank rate hike

21 Sep 2022

Consumer inflation slowed to 7.6% in August from 7.8% in July, Statistics South Africa said on Wednesday. This raises the prospect that inflation has peaked but will not stay the hand of the SA Reserve Bank, which is expected to hike rates again on Thursday by between 50 and 100 basis points.

The latest inflation figure is a rare piece of recent good news on the economic front: a key indicator that is moving in the right direction. Among other things, it provides some vindication for the SA Reserve Bank’s (Sarb’s) current tightening cycle and determination to bring inflation back within its mandated 3% to 6% target range.

Having said that, there is not much Sarb can do to contain inflation driven by external shocks such as Russia’s war in Ukraine.

While the number offers hope that South African inflation peaked at 7.8% in July, the consumer price index (CPI) is expected to remain above the top range of Sarb’s target for the rest of the year. The central bank will not stay its hand and is widely expected to hike rates again on Thursday by between 50 and 100 basis points when its Monetary Policy Committee (MPC) wraps up its September meeting.

“Our projections are for monthly price pressures to remain moderated for the remainder of this year. Annual inflation, however, should remain above 6%, likely posting 7.7% in September and averaging close to 7% for 2022,” Koketso Mano, FNB Senior Economist, said in a note on the data.

“There is a likelihood that headline inflation peaked at 7.8% in July, given the trends in fuel prices, but this view could be strongly challenged by rapid food inflation.”

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Roaring oil prices fuelled this year in large part by Russia’s invasion of Ukraine have stoked global and South African inflation, but there is now some relief in this regard. Fuel prices decreased 3.8% month on month in August because of the more than R1 per litre cut in petrol prices at the pump. But year-on-year fuel inflation was still 43.2% – that number only looks good in contrast to July, when it was raging at 56.2%.

Worryingly, domestic food inflation continued to accelerate even as global food price rises have moderated in recent months. The food and non-alcoholic beverages (NAB) component of CPI raced to 11.3% in August from 9.7% in July.

“Nine of the 11 food and NAB categories recorded an annual inflation rate above 8.0% in August. Bread and cereals registered an increase of 3.1% between July and August, pushing the annual rate from 13.7% to 17%. Maize meal increased by 4% from July, taking the annual rate to 29.1%,” Stats SA said in a statement.

These trends are adding to the burden of lower-income and working-class households, which have limited disposable income, given an unemployment rate of almost 34%. That could well drive wage demands over the coming months and into next year.

Inflation may finally be ebbing – or maybe not – with a lot hinging on the performance of the rand, which late on Wednesday was hovering around 17.70/dollar, near its lowest levels in more than two years. Load shedding is also load shedding the value of the rand and, if the current surge in power cuts cannot be eased, it could certainly falter further.

Sarb has hiked its key repo rate from record lows by 200 basis points since November last year, bringing it to 5.5% and the prime lending rate to 9.0%.

Thursday’s expected hike may also be dictated by the size of the hike that the US Federal Reserve opts for on Wednesday. Regardless, further tightening is seen on the cards well into 2023. Even if inflation has turned a corner, South African consumers are unlikely to get much relief. DM/BM

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