South Africa

Don’t let South Africa’s core inflation surge fool you, Absa says


South Africa’s core inflation rate probably increased at the fastest pace in six years in February, spurred by a sharp rise in health-insurance premiums, Absa said.

The core consumer price index, which excludes the effects of volatile items including food and energy, likely rose an annual 5.2% last month from 4.9% in January, Absa economists led by Miyelani Maluleke said in a research note.

That would be the highest rate since February 2017. Overall, inflation probably quickened to 7% from 6.9%, they said.

The central bank targets inflation at 3% to 6%, with the MPC preferring to anchor expectations at the midpoint. Core inflation hasn’t accelerated for the past three months.

“Given elevated concerns about inflation risks currently, the market may initially read such a jump in core CPI inflation as an indication of broadening inflationary pressures,” the economists said.

“However, the data should be watched more closely to distinguish between widening inflationary pressure and idiosyncratic factors related to medical-health insurance.”

Health insurers including South Africa’s biggest medical-aid provider, Discovery, along with Medihelp Medical Aid and Momentum Health Medical Scheme, have started resetting prices higher after keeping them low for the past two years, as claims return to pre-Covid-19 levels, the cost of care increases and excess reserves shrink.   

“Based on announcements by various medical aid scheme providers, we estimate that health insurance premium inflation will average 6.4% in 2023, up from 4.2% in 2022,” the Absa economists said.

“Given that the category accounts for 7.1% of headline CPI and 9.5% of core CPI, the higher inflation will have an appreciable effect on the CPI data when surveyed in February and April.”

Still, mounting price pressures from a 7% depreciation in the rand against the dollar this year, as well as rising food and gasoline costs, may see the central bank’s monetary policy committee increase interest rates when it meets at the end of this month.

Forward-rate agreements used to speculate on borrowing costs, show traders are pricing in a 25 basis-point increase. 

Pretoria-based Statistics South Africa will release February inflation data on March 22. 

Absa is South Africa’s third-biggest bank.