Hidden threat to inflation and interest rates in South Africa

While the main drivers of inflation in South Africa seem to be under control, a new risk has emerged that could threaten the country’s inflation and interest rate outlook – rental inflation.

Standard Bank’s Group Head of South Africa Macroeconomic Research, Elna Moolman, explained that consumers are currently set to experience ongoing relief from benign food inflation.

This comes after Statistics South Africa released the consumer inflation print for December 2025, which showed that CPI inched slightly higher to 3.6%.

While an increase from November’s 3.5% outcome, December’s print is still considered benign and is close to the Reserve Bank’s 3% target, which was formalised in November last year.

The benign outcome for December is largely attributed to a muted contribution from food and fuel inflation, two of the biggest drivers of price changes in the country.

In December, food and non-alcoholic beverages inflation reached 4.4% and contributed 0.8 percentage points to the headline CPI figure.

Fuel prices rose by 1.6% year-on-year following petrol and diesel price increases in December.

“For consumers, the data implies ongoing relief from benign food inflation,” Moolman said following the release of the inflation data for December.

“At 4.4% year on year, we expect food inflation to remain quite benign this year, underpinned by both favourable global and domestic dynamics.”

However, Moolman pointed out that December marked the second consecutive quarterly survey in which rental inflation increased quite noticeably. 

“Following the plunge in rental inflation during lockdown, it recovered slower than generally expected, but now seems to be catching up quite quickly,” she said. 

She explained that this is one of the key forecast risks for the year ahead, although it is generally expected that inflation will remain quite benign, supported by a strong rand.

The Reserve Bank has been very clear regarding its new 3% inflation target, which was formalised in November 2025.

Reserve Bank Governor Lesetja Kganyago has emphasised that any inflation outcome above or below 3% will be responded to with monetary policy adjustments.

Therefore, any inflation print or inflation expectations above 3% could see South Africa have higher interest rates for longer, as the Reserve Bank remains highly cautious in an uncertain environment.

Rental pressure in South Africa

The Competition Commission noted in its latest Cost of Living Report that actual rentals for houses and flats in South Africa increased by only 12% between 2020 and 2025.

Headline inflation escalated by 28% over that same period, signalling that rental inflation for both houses and flats lagged overall inflation significantly.

The Covid-19 pandemic placed severe downward pressure on rental inflation, as landlords and property agents were cautious about raising rentals due to economic uncertainty.

However, the report explained that, following the pandemic, rentals have been increasing, although at a much slower rate compared to overall inflation. 

According to PayProp, the first quarter of 2025 saw the strongest growth in 8 years, with average residential rent now above R9,000.28.

This figure continued to climb as the year progressed, with PayProp’s Rental Index for the third quarter of 2025 reporting an average rent of R9,286, marking a 4.9% year-on-year growth.

Rising rental prices are disproportionately affecting South Africans in different provinces.

For example, the Western Cape has consistently reported the highest rents in the country, with the average rent in the province standing at R11,635 in the third quarter of 2025, far higher than the national average.

In contrast, the Free State has seen its average rental growth slow over the past year, averaging R7,120 in the third quarter, considerably lower than the national average.

This means that the difference in average rentals between South Africa’s most expensive province, the Western Cape, and the cheapest province, the Free State, is R4,515.

“After several quarters of strong real-terms rental growth, we are starting to see affordability pressure build,” said PayProp’s Michelle Dickens.

“While most tenants are still managing their commitments well, the rise in the number of tenants in arrears is a reminder that sustained increases in rent, debt levels and living costs can quickly squeeze budgets.”

The proportion of tenants in arrears rose to 17.2% in the third quarter of 2025, the highest level in a year.

PayProp’s data also showed that while rent-to-income ratios have remained stable at an average of 31.2%, tenant finances are under increasing pressure from higher debt obligations.

Applicants are now spending 47.8% of their income on debt repayments, leaving just R1 in every R5 of income available after rent and debt.

“While the sector remains fundamentally sound, we are entering a more delicate phase for tenant affordability,” Dickens said.