Worst of inflation is over

South Africa is passed the worst point of the inflation cycle, with a material moderation of price increases likely to come before the end of 2023. 

This is according to the chief economist at the Bureau for Economic Research (BER), Hugo Pienaar, who spoke to Business Day TV about the BER’s Inflation Expectations Survey. 

In the Q2 2023 survey, expectations for average inflation in 2023 rose by 0.2 percentage points to 6.5%. For 2024 and 2025, expectations increased by 0.1 percentage points to 5.9% and 5.6%, respectively.

Pienaar explained that the increase in expectations is partly due to the survey results being collected before the official Consumer Price Inflation (CPI) data was released. 

Thus, respondents were unaware of the annual inflation rate reduction in May, continuing April’s downward trend.

StatsSA announced that the annual CPI was 6.3% in May 2023, down from the 6.8% recorded in April 2023. This is the lowest inflation the country has seen since April 2022.

The BER survey also showed that wage expectations are coming down, which will reduce inflationary pressure. 

“We have passed the worst point of the inflation cycle and will see a material moderation in price increases,” Pienaar said. 

Pienaar and the Reserve Bank anticipate that inflation will drop below 6% in the second quarter, bringing it inside the Bank’s target range. 

Inflationary pressures are still apparent, particularly in food production. Food inflation decreased to 11.8% in May. 

Pienaar also cautioned that inflation may stay high due to several wage agreements with multi-year settlements of 6-7% increases per annum. 

Load-shedding may also contribute to keeping inflation high, with companies taking on additional costs to mitigate its effects. 

Persistent high inflation with minimal to no economic growth means, “You could probably talk about a sort of stagflationary environment in South Africa.”

However, this is highly unlikely, with inflation coming down from its peak and economic growth expected to increase next year. 

Pienaar’s comments echo those of the Reserve Bank governor, Lesetja Kganyago. 

Kganyago said the fight to tame rising prices delivered results, and the central bank will stick to its task to get them under control.

“Inflation has turned the corner,” Kganyago said in an interview last week on Metro FM. “What we need to see is inflation declining all the way to within our target range.”

The central bank’s monetary policy committee has increased the key rate by 475 basis points to 8.25%, its highest level in 14 years.

It is trying to bring inflation down to the 4.5% midpoint of its target range, where it prefers to anchor price-growth expectations. 

Inflation has been above that level for more than two years and is forecast by the central bank to return to the midpoint in the third quarter of 2025.

The central bank will stop hiking rates once it’s confident that inflation is returning to the midpoint of its target range.