CPI breaches SA Reserve Bank inflation midpoint, but experts say rates to remain unchanged

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Statistician-General Risenga Maluleke said the change in the CPI between July 2021 and August 2021 was 0.4%. Photo: Supplied
Statistician-General Risenga Maluleke said the change in the CPI between July 2021 and August 2021 was 0.4%. Photo: Supplied

BUSINESS


On Wednesday, Stats SA said South Africa’s consumer price index (CPI) in August increased to 4.9% from 4.6% in June and July.

Statistician-General Risenga Maluleke said the change in the CPI between July 2021 and August 2021 was 0.4%.

“This is the fourth consecutive month where the annual increase is higher than the 4.5% midpoint of the SA Reserve Bank’s monetary policy target range,” said Maluleke.

Vehicle prices increased at a rate higher than overall inflation across all 16 months from May 2020 to August 2021
Statistician-General Risenga Maluleke

He added that transport was the most significant contributor to both the annual and monthly inflation readings in August, increasing by 9.9% annually and 2.2% monthly.

“Vehicle prices increased at a rate higher than overall inflation across all 16 months from May 2020 to August 2021,” he said.

Maluleke said petrol prices recorded all-time highs in August 2021, with the price of inland 95-octane petrol, for example, reaching R18.30 per litre.

He said fuel prices increased by 4.9% between July and August, and by 19.6% over the last 12 months.

“Public transport fares registered an increase of 1.5% between July and August, underpinned by a rise in airfares (up 21.6%). The annual increase for public transport was 5.3%,” said Maluleke.

Patrick Kelly, Stats SA’s chief director for price statistics, said the food and nonalcoholic beverages product group was the second-largest contributor to the annual inflation rate in August, recording an increase of 6.9%.

“This is the highest level of food inflation since June 2017, when it was also 6.9%.

READ: Food prices spike as Covid-19 disrupts local and global supply chains

“However, there are signs that food inflation may have begun to slow. The monthly increase in August 2021 was 0.2% – identical to the readings for both July and June.

“By comparison, the average monthly increase over the past 12 months was 0.6%. Of the 11 food and nonalcoholic categories, four registered monthly decreases in August, one showed no change and six recorded increases,” said Kelly.

The agency saw a decline of 0.5% from July 2021 for bread and cereal prices. Maize meal prices also decreased by 1.2% and white bread by 1.1%, he said.

Kelly said meat inflation continued to accelerate, reaching 10.7% in August.

“This is the highest level since February 2018, when the rate was 11.4%,” said Kelly.

36% of their spend goes to housing and utilities while higher-income households spend more – about 21% on transport and 20% on miscellaneous goods and services
FNB economist Siphamandla Mkhwanazi

FNB economist Siphamandla Mkhwanazi said the increases in food prices affect poor and vulnerable households the most, because “households with lower spending capacity tend to spend mostly on food and nonalcoholic beverages”.

He added that households in the middle-spend quantile spend mostly on housing and utilities.

“About 36% of their spend goes to housing and utilities while higher-income households spend more – about 21% on transport and 20% on miscellaneous goods and services,” he said. He added that the bulk of miscellaneous spend goes to insurance.

FNB chief economist Mamello Matikinca-Ngwenya said the CPI basket of decile 1 (the most vulnerable and poor income groups) consists more of food, which makes its inflation experience vulnerable to the large swings in food prices.

“One example is the most recent drought in 2015/16, when food inflation increased by 7.8 percentage points trough to peak.

“Staple foods such as bread and cereals rose 14.2 percentage points trough to peak, from 3.2% in June 2015 to 17.4% in December 2016,” she said.

She added that, going into 2018, decile 1 inflation had moderated on slowing food and nonalcoholic beverages inflation as well as low electricity inflation, “which was 2.2% at the time”.

“Decile 1 inflation started rising again following the introduction of the sugar tax in 2018, as well higher electricity inflation,” added Matikinca-Ngwenya.

READ: Fuel and food prices, and static salaries make consumers vulnerable

The increase in inflation comes a day before the SA Reserve Bank’s interest rate decision announcement tomorrow.

Interest rates remain at five-decade lows and, according to FNB senior economist Thanda Sithole, the Reserve Bank has signalled that a hiking cycle is imminent.

However, Sithole said the timing of the start of the hiking cycle is difficult to predict, but the Reserve Bank has maintained that it will remain data-dependent.

“Some peer central banks have started hiking rates, but these countries have inflation problems, which South Africa does not reflect,” said Sithole.

We have not yet seen pass-through from elevated global inflation, as domestic demand remains low
FNB senior economist Thanda Sithole

FNB said the country’s headline inflation of 4.9% is close to the preferred midpoint of the 3% to 6% inflation target range, and core inflation – a better reflection of demand-driven inflation – is closer to the bottom of the target range, at 3.0% in July.

“Moreover, surveyed inflation expectations remained anchored to the midpoint in the [second quarter of 2021], despite rising inflation at the time.

“So, the starting point of the inflation forecast is muted, and we have not yet seen pass-through from elevated global inflation, as domestic demand remains low,” said Sithole.

Sithole added that, although real GDP growth is recovering, the civil unrest that took place in July is expected to have temporarily disrupted this recovery.

“Real GDP recovery to 2019 levels is expected to be protracted, with employment lagging even further, limiting the extent of recovery in domestic demand.

READ: SA's economic freedom slumps, exacerbates unemployment crisis

“Nonetheless, hiking by advanced economy central banks is expected to start in 2023, which should place upward pressure on South Africa’s neutral interest rates. These are some discussion points that the monetary policy committee will have at the September meeting,” said Sithole.

He added that the consensus expectation is for rates to remain unchanged at 3.5%.


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