Consumer price inflation (CPI) is expected to have bridged 7% when Statistics SA releases its figures for last month on Wednesday. In May, CPI surged to 6.5%, overshooting the Reserve Bank’s target range of between 3% and 6% with the sweet spot for inflation being 4.5%.
Driving headline inflation were food and fuel prices in May which went up by 7.6% and 32.5% year-on-year, respectively. The fuel number helped push the overall transport basket inflation to 15.7%.
While food and fuel inflation were being driven by supply side shocks, there was concern that this may to lead to an increase in core inflation.
Arthur Kamp, chief economist at Sanlam Investments, said:
“Not surprisingly, wage demands are increasing amid rising inflation expectations, which should be reflected in upcoming inflation expectation surveys. These are the channels through which food and fuel price increases feed through into core inflation.”
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Kamp said South Africans were not only battered by supply side shocks as a result of the war between Ukraine and Russia, but also by a weakened rand, which is feeding into inflation. The rand has come under added pressure because of a stronger US dollar, among other things.
“We import key foods, so we usually don’t produce enough wheat which we obviously use for bread. We also import maize, a staple food in South Africa and important for animal feed and so goes into meat prices. Maize prices in South Africa are also driven by the currency because we have import and export parity pricing.
“Even if you got a surplus of maize, its still an export parity price that is driven in part by where the currency is. The currency directly feeds into grain – maize and wheat – and by extension into meat prices and of course it has a direct impact on fuel.”
Moody’s Investors Service predicted that the country’s inflation rate would peak at around 8% this year. The Reserve Bank’s had revised higher its headline inflation forecast for this year to 5.9% due to increased prices in food and fuel prices.
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Food and fuel prices were the main drivers of headline inflation over the last few months. Food prices were expected to remain elevated for this year, while fuel price inflation was expected to ease next year. But recent wage increases were also likely to feed into the inflation number going forward.
Isaac Matshego, economist at Nedbank, said: “The higher wage settlements will contribute to inflation persisting at higher levels.”
The monetary policy committee (MPC) is expected to hike interest rates by at least half a percent on Thursday in part because of a weaker rand and a to respond to other central banks which are in a tightening cycle. The move to hike interest rates by the US Federal Reserve, a stronger US dollar and tightening of global financial conditions, have seen the volatile local currency weaken which is inflationary may further add to the case for the MPC to increase interest rates.
He explained that the boom in coal prices has not been able to aid the local currency as other minerals such as the platinum group metals did not perform as expected. He added that the Reserve Bank still had room to hike rates as the repo rate was still well below its neutral level and must be expected to continue increasing.
“We’ve got to think about the level of the real repo rate that the Reserve Bank is targeting. My sense is that the Reserve Bank is looking at a real repo rate of 2% to 2.5% above inflation. That means that with CPI continuing to increase and being above 6% we’re going to see the repo rate increasing until it’s at the level above CPI. This means we could see prime [interest rate] going to 10.5% to 11%,” Matshego said.
The rise in interest rates, albeit low by global standards, coupled with other increases have thwarted the growth in consumers disposable incomes. The recent FNB/BER consumer confidence index showed the strain consumers were under. All this could lead to real discretionary consumer spending waning in the coming months.
Matshego was hopeful:
But monthly data point to a contraction of the economy in the three months to last month. At its last meeting in May the MPC projected that economic growth would come in at 1.7% but at the rate that things are going it seems Africa’s most developed economy would be lucky to see growth above that materialise.
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Kamp added: “A combination of the KwaZulu-Natal floods and load shedding must have resulted in a material contraction in real GDP in the second quarter of this year. At the same time, global recession worries have surfaced, which makes the outlook for commodity prices and domestic GDP growth murky heading into next year.”