Bad news for inflation for the rest of 2024

South Africa’s inflation is expected to accelerate in the last two months of the year, as slightly higher petrol prices and low base effects present upside risks.

This is according to Investec chief economist Annabel Bishop, who said inflation is still expected to stay within the Reserve Bank’s target range of 3% to 6%.

This comes after South Africa recorded its lowest inflation rate in four years in October when CPI inflation dropped to 2.8%.

However, the downward trend seen in South Africa’s inflation rate over the past few months is expected to reverse in November and December.

Bishop explained that, instead of seeing a fuel price cut, as has been the case for the past five months, a hike occurred, and CPI inflation will likely rise back above 3% in November

While only a modest 25 cents/litre increase in the petrol price occurred in November, Bishop said the low base effects of a year ago will push CPI inflation towards 3.2%.

In addition, she pointed out that November is also a higher survey month than October.

Looking forward, December also faces a low base, and, therefore, CPI inflation will rise further year-on-year to close to 3.5%, although little change in the fuel price is likely. 

Despite the slightly higher end to inflation in 2024, Bishop said South Africa is still expected to experience a low inflation period over 2025, with headline inflation running below 4.5% for the year.

She said CPI inflation is currently likely to average around 4.0% in 2025.

This is in line with the South African Reserve Bank’s (SARB) expectations, which it shared at the latest Monetary Policy Committee meeting.

Reserve Bank Governor Lesetja Kganyago said upside risks to the inflation outlook remain – with new risks emerging.

“In the near term, inflation appears well contained. However, the medium-term outlook is highly uncertain, with material upside risks,” he said.

“These include higher prices for food, electricity and water, as well as insurance premiums and wage settlements.”

The bank expects inflation to remain below 4% well into 2025, but it said higher inflation could occur in the second half of next year due to factors like Eskom’s proposed electricity tariff increase.

“Global interest rates could well shift higher again, and the recent rand depreciation demonstrates how rapidly changes in the global environment can affect South Africa,” he said.

However, South Africa’s rate-cutting cycle is expected to continue into 2025, with the Reserve Bank expected to make 100 basis points of cuts in this cycle, with two 25-point cuts already implemented.

South Africa’s CPI inflation in 2024 can be seen in the graph below, with November and December rates still based on projections.

Lower inflation target for South Africa

In 2024, Kganyago furthered the debate around lowering South Africa’s inflation target, which had been ongoing for years.

South Africa introduced a formal inflation target in 2000, with a target range of 3% to 6%. This was intended to gradually reduce to between 2% and 4%, but this reduction was never implemented.

Since 2021, the Reserve Bank has revived the debate, arguing that the target should be reduced to 3% to better align South Africa with global norms. 

There have been arguments for and against this change, with detractors arguing that lowering the target will have significant implications for interest rates, which will most likely be kept higher for longer. 

On the other side of the debate, Kganyago has said lowering the target can be achieved at relatively little cost. 

“We were clear that we wanted inflation at 4.5%, and we delivered,” Kganyago said. Still, South Africa’s inflation rate has remained relatively high compared to its international peers. 

“We have a relatively high inflation rate. We often speak as if this is a structural, inevitable thing and not a policy choice.” 

“But the fact is, we could have a lower inflation target, like almost all our peers, and with it, lower inflation.”

In November, Kganyago said a review of its 3% to 6% inflation target was getting close to the end.

“We have got a process with the Treasury that we believe is coming to a conclusion,” Kganyago said.

“I can’t quite give you the timeline because the debates become very rigorous, and once that process completes itself, we will say what the target is, whatever the number becomes.”

The International Monetary Fund (IMF) recently gave the idea of a lower inflation target in South Africa its seal of approval.

The organisation said South Africa would gain significant economic benefits by adopting a lower inflation target, though the process should be carefully managed.

“Shifting from the current target band to a lower point target at an appropriate time could help lower expectations and inflation, supporting medium-term macroeconomic stability,” it said.

“Inflation expectations have stayed above SARB’s midpoint of the target range, putting pressure on inflation, which disproportionately affects the poor.” 

“The inflation differential with main trading partners also puts pressure on the exchange rate”.

The IMF said close coordination between the National Treasury, which sets the target, and the SARB and clear communication of policy plans will be critical to support credibility and anchor expectations. 

“A well-calibrated tolerance band can help provide flexibility given the volatile and shock-prone global environment,” it said.