Bad news about inflation in South Africa

Despite South Africa’s inflation moderating in March, April’s print may be higher due to a lower base for comparison, and inflation is still expected to average around 5% this year.

This is according to Investec chief economist Annabel Bishop, who explained that April is coming off a low base, which could boost the outcome. 

Inflation moderated to 5.3% in March on a high base effect after being on an upward trend since December 2023.

Bishop said April’s fuel price increase was more moderate than March’s, which will help contain consumer price index (CPI) inflation for the month. 

She explained that statistical base effects have a direct impact on the inflation outcome, as the inflation rate is a year-on-year calculation of the CPI. 

“A large monthly increase a year ago creates a high base, moderating March’s outcome,” she explained.

In addition, oil prices came off recently as the start of the US interest rate cut cycle has been delayed, causing expectations of demand for oil to dull somewhat with little change building for June’s petrol price.

The US Federal Open Market Committee (FOMC) continues to leave the fed funds rate unchanged as economic activity in the country has continued to expand at a solid pace. 

The US job gains have also remained strong, and its unemployment rate has remained low.

However, inflation remains elevated, and in recent months, there has been a lack of further progress toward the Fed’s 2% inflation objective.

Bishop said the FOMC continues to signal that interest rate cuts are unlikely in the near term and “that the risks to achieving its employment and inflation goals have moved toward better balance over the past year”.

The FOMC’s latest meeting saw markets firm expectations around a November cut, which led to some mild rand strength.

However, the rand remains volatile and subject to rapid change on differing US data prints.

In addition, food price inflation, the other big driver for the CPI, remains contained in South Africa, with little pressure either at the agricultural level, as PPI inflation has not yet seen feed-through effects from crop damage in summer due to high temperatures.

However, the Reserve Bank’s Monetary Policy Review noted the risks are still tilted to the upside for inflation for the year as a whole.

Bishop said that while Investec expects CPI inflation to average around 5.0% year-on-year, the upside risk has eased slightly recently. 

The better-than-expected forecast for South Africa’s summer harvest, versus agricultural economist expectations, is positive for the country’s inflation outlook.

In addition, rand strength helps reduce inflation, as both food and fuel prices in South Africa are driven by international commodities.

However, the domestic currency will need to see substantial, sustained strength to make an impact on South Africa’s inflation outcomes.