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The annual average consumer price index (CPI) for last year surged to its highest level since the end of the global financial crisis in 2009, rising to 6.9% last year from 4.5% in 2021, according to Stats SA.
On a monthly basis, inflation dipped last month to 7.2% from November’s 7.4% year-on-year, with food and fuel inflation continuing to be the main drivers of inflation. Food and non-alcoholic beverages inflation was up 12.4% year-on-year, contributing about 2.1 percentage points to overall CPI. While fuel inflation was up 22.8% when compared with the same period last year, the overall transport basket increased by 13.9%. However, inflation excluding these two items – or what is known as core inflation – was much lower last month at 4.9% year-on-year.
Investec’s Annabel Bishop said the lower core inflation and easing headline inflation would not change the Reserve Bank’s trajectory at this time.
Bishop said:
Bread and cereal prices have fuelled the spike of average prices for food over the past 12 months. The annual increase of bread and cereal products rallied to their highest reading since 2009, at 20.6% year-on-year last month.
This is not surprising, given how supply chain disruptions as a result of Russia's invasion of Ukraine contributed to a surge in wheat and maize prices. Wheat prices had risen by 33.9% by June, and tapered down towards year end.
Stats SA said: "Maize meal prices rose by 33.7% in the 12 months to last month, with a monthly increase of 1.9%. The index for rice increased by 1.3% between November and last month, taking its annual rate to 7.8%. Meat inflation slowed to 9.7% in December from 10.5% in November. Oils and fats inflation cooled for the fourth consecutive month, declining to 22.4% last month."
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Nedbank economist Johannes Khoza said risks to the inflation outlook remained on the upside, emanating mainly from the global oil price, the volatile currency and increases in electricity tariffs.
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"Meanwhile, the National Energy Regulator of SA granted Eskom permission to increase electricity prices by 18.7% this year. While this was lower than the 32% hike the power utility wanted, it will still be a significant contributor to inflation. These factors could cause inflation to remain high for longer or recede at a much slower rate," he added.
The inflation outlook among analysts, businesspeople and trade unions, as surveyed by the Bureau for Economic Research (BER), worsened for this year. Expectations are that inflation will be 6.1%, from 5.9%, for this year, and 5.6%, from 5.3%, for next year.
On economic growth projections, the BER found that:
Speaking to the media before the start of the World Economic Forum (WEF), Finance Minister Enoch Godongwana said he expected GDP growth to average 1.6% until 2025.
He added: "There’s a tendency in South Africa to debate … macroeconomic theory and which theory is right. You can have the best policy on paper but if you can’t provide electricity, it’s useless. If you can’t deal with crime, your policy can’t work … and similarly with the logistics challenges, particularly Transnet."
Khoza said the economy was facing lower growth prospects as consumer demand waned in response to the cumulative 350 basis point interest rate increase since November 2021, among other things. He said interest rate hikes were nearing the end in this cycle.
He said:
Khoza is expecting a less aggressive interest rate hike next week when the Reserve Bank’s monetary policy committee (MPC) meets to decide on rates.
"We forecast another two hikes of 25 basis points each in January and March. This will take the prime lending rate to a peak of 11%. Unlike the consensus, we do not expect any rate cuts later this year due to the upside risks to the inflation outlook. If inflation proves stickier than we expect, the MPC could raise interest rates to a higher peak."
