Big petrol and diesel price increases in September will likely cause headline and core inflation to diverge again in the coming months.
Earlier this month, StatsSA announced that the annual headline consumer price index (CPI) was 4.7% in July 2023, significantly down from the 5.4% recorded in June 2023.
July’s rate is within the South African Reserve Bank’s (SARB’s) inflation rate target range of 3% to 6% and close to its midpoint of 4.5%.
South African inflation has now hit a two-year low and was significantly better than market expectations.
However, this can change in the coming months because of the significant fuel price increases on the cards next month.
Petrol prices are expected to climb by around R1.60 per litre, while diesel will likely increase by R2.80 per litre.
The Department of Mineral Resources and Energy will announce the official changes within the next week. The price increases will kick in on Wednesday, 6 September.
Hugo Pienaar, chief economist at the Bureau for Economic Research (BER), said the outsized fuel price increases will affect inflation.
“With outsized South African fuel price hikes on the cards in September, headline and core CPI are set to diverge again in coming months,” Pienaar said.
- Core inflation refers to the CPI excluding food, non-alcoholic beverages, fuel, and energy.
- Headline inflation is a measure of the total economic inflation through the CPI that includes food, non-alcoholic beverages, fuel, and energy.
Pienaar said headline inflation has probably reached the low of the cycle, while core CPI still has scope to ease further.
“It will be interesting where the focus of the South African Reserve Bank lies in its September policy rate decision,” he said.
The next SARB Monetary Policy Committee (MPC) meeting and interest rate decision will occur on 21 September.
Efficient Group chief economist Dawie Roodt said the recent 4.7% inflation rate was an excellent number but, like Pienaar, warned that fuel prices can cause some headaches.
“I have to warn that there are some price increases which have to work themselves through the economy,” he said.
“The most recent price increases in petrol and diesel will only be reflected in two months’ time and will push inflation up again.”
Despite the fuel price increases, Roodt is optimistic that there will be no further interest rate increases this year.
“I expect the Reserve Bank to make a lot of noise about the risk of inflation, but it is not going to increase interest rates at its next meeting,” he said.
Roodt said the current repo rate, at 8.25%, and the inflation rate at 4.7% is where it should be based on the Reserve Bank’s mandate.
“If inflation remains where it is and by the end of the year starts drifting lower, there is a possibility of a rate cut by the end of 2023 or early 2024,” he said.
Sanisha Packirisamy, an economist at Momentum Investments, shares Roodt’s view, saying the latest inflation figure substantiates another pause in the interest rate in September.
However, Packirisamy expects interest rate risks to delay a potential Reserve Bank interest rate cut to later next year.
The risks include global food price uncertainty, oil prices, higher administered prices, the energy crisis, logistics constraints, higher salaries, and persisting rand weakness.
“Taking the balance of risks to inflation and growth into account, we expect a protracted pause in interest rates and the first interest rate cut in the second quarter of next year,” he said.