New inflation data sparks Reserve Bank rate hike worries

The August inflation print showed a marginal increase in South Africa’s consumer price index (CPI). Some experts believe this could be the start of another upward inflation trend and open up the possibility for another South African Reserve Bank (SARB) interest rate hike.

Stats SA announced today that headline inflation ticked up to 4.8% in August, a marginal increase from 4.7% in July.

Monthly headline inflation was 0.3%, with core items and fuel contributing to this pressure. Core inflation was 0.3% month-on-month and 4.8% year-on-year, up from 4.7% in July. 

FNB senior economist Koketso Mano said the August survey of municipal tariff increases, water and other services were the major contributors. Smaller contributions by other core items explained the rest.

Average fuel prices lifted by 2.2% between July and August, but fuel prices were 11.7% lower than in August 2022.

The outstanding municipal electricity tariff increases averaged 0.8% month-on-month, increasing electricity inflation to 15.1% year-on-year.

She said these additional municipal tariff hikes resulted in municipal inflation rising from 10.3% in July to 11.7% in August.

Interestingly, food and non-alcoholic beverages inflation – normally a significant inflation driver – softened further to 8.0% year-on-year, down from 9.9%, and there was no monthly price pressure. 

While items such as vegetables, non-alcoholic beverages, and sugar had positive monthly pressure, Mano said this was counteracted by monthly meat deflation.

“Adjusting our forecast with this outcome suggests that headline inflation could lift to 5.5% in September,” she said. 

“A weak rand and higher international oil prices resulted in a sizeable fuel price hike in September, which should shift fuel prices back into inflationary territory after recording annual deflation in the past three months.” 

“Furthermore, the undervalued rand should continue to exert upward pressure to broader imported inflation.”

Mano anticipates that headline inflation will average around 6.0% this year, lower than 6.9% last year, having benefitted from earlier positive base effects and constrained consumer spending that should limit the extent of input cost passthrough.

In addition, slowing inflation has supported softer inflation expectations. This, along with signs that restrictive monetary policy is gradually limiting credit activity, should provide some comfort to the SARB’s Monetary Policy Committee (MPC). 

“In line with this, we anticipate that the MPC will keep interest rates unchanged at the upcoming meeting,” she said.

“However, a resurgence in global energy inflation will be concerning to central banks, maintaining upward risks to interest rates.” 

“Furthermore, rising local funding vulnerabilities and the weak rand will keep the MPC trigger ready. For now, these risks suggest that local rates should remain restrictive going into 2024.”

An anxious MPC

PwC senior economist Xhanti Payi echoes Mano’s sentiments.

He told Daily Investor that the rise in headline inflation in August, while marginal, is likely to cause the MPC some anxiety, given that it is both in headline and core inflation. 

Furthermore, August’s CPI represents a tracking away from the midpoint of the SARB’s target range (4.5%).

Xhanti identified food as a key issue in the inflation outlook.

“Of major concern is the outlook for food prices. While South Africa has enough reserves for grain, the price pressures will likely come from global food prices,” he said.

“India’s decision to ban rice exports in July adds to the risks of rising global food prices. India is the second largest rice supplier to South Africa, with an average annual share of 21% over the past five years.”

Since rice is among South Africa’s staple foods, this is cause for concern for families and policy-makers, he said.

In addition, Russia has announced that it will not be opening the Black Sea to allow the passage of grain. This, too, will put pressure on the global grain price outlook.

Another key concern is the fuel price, as the oil price has been rising steadily, and South Africa has already seen increases.

Xhanti said the SARB is not just facing local price factors but effects that may come from the exchange rate. 

“We know that the EU has raised policy rates to record highs. The US is expected to raise rates, too, given their sticky inflation,” he said.

“This may mean the interest rate differential could see the rand weaken as investors move capital – which could be inflationary.”

However, South Africa’s monetary policy is already tight, and there are indications that the country may see reductions in fiscal spending due to lower-than-expected fiscal revenues. 

This means continued hikes could push South Africa to a downward spiral in terms of growth. 

“The SARB is likely to be concerned about this. While they are independent, they are not blind to fiscal developments,” he said.

“On balance, we think the SARB will hold interest rates for now and continue to watch developments.”

South Africa’s inflation was up only marginally in August, but this could be the start of higher inflation and a sign of another Reserve Bank interest rate hike in 2023.