The shock South Africa really didn’t need
The latest inflation print of 5% year-on-year for June came as a surprise to markets, driven by a fuel price shock that now threatens to persist longer.
Because of the fuel price shock, costs are rising across the supply chain, hitting producers and consumers and cementing higher interest rates in the country.
This represents a significant swing in expectations, contrasting with hopes of continued easing in inflation and fuel prices and a quicker return to interest rate cuts.
According to Economists at Momentum, the inflation reading for June was driven primarily by higher private and public transportation costs following the war-inflicted increase in fuel prices.
Transport inflation spiked to 12.7% y/y in June from 9.4% y/y in May. Core and services inflation also accelerated in June, reflecting higher transport services costs.
While fuel prices caught a break in July, with decreases in petrol and diesel, the collapse of peace talks in the Middle East is likely to make this short-lived.
Current estimates from the Central Energy Fund (CEF) point to another petrol price cut on the cards of around 50 cents per litre in August—but diesel prices have already swung into a probable hike.
Diesel prices are currently set for a 60-90 cents-per-litre increase next month.
Momentum said that these numbers are likely to shift as the Middle Eastern conflict evolves—but the prospects are not as positive as they once were.
“The collapse of the United States-Iran ceasefire reignited oil market uncertainty,” Momentum said.
Oil prices in particular have shot towards $95 a barrel, after analysts had optimistically projected prices to be bound to around $80 a barrel. A previously “unlikely” $100 a barrel level is now in view.
The war’s impact on pricing has been exacerbated by Russia’s diesel export ban, which has tightened global diesel supply and increased the upside risks to local fuel prices.
The economists noted that the impact of these price shocks has been concentrated in transport-related inflation categories so far.
However, inflation expectations have shot up to 4.4%, and broader pass-through effects may be coming, which will be a key factor in the South African Reserve Bank’s interest rate decisions.
“The magnitude of the acceleration in inflation in June was unexpected [and] the balance of risks has shifted to the upside,” Momentum said.
Interest rate pain is coming
The SARB’s Monetary Policy Committee (MPC) will announce its next policy move on Thursday (23 July), with a 25-basis-point interest rate hike now firmly expected.
Given the 5% inflation surprise and the fuel price shocks persisting, there is now also a chance that the hike could be higher, at 50 basis points.
Momentum said that the 25bp hike is most likely, but added that the MPC itself might still be divided on the matter.
“Another hike was [previously] not widely expected at the July MPC meeting, although the possibility was not ruled out, given the upside risks to the inflation outlook,” the economists said.
“Since then, the balance of risks has become less favourable. Services inflation has accelerated, which is likely to attract the SARB’s attention, given its tendency to be more persistent than goods”
Given that the ceasefire between the US and Iran has collapsed, geopolitical tensions have intensified, and inflation expectations have risen, the risk of inflation sticking higher has also increased.
Momentum added that renewed uncertainty surrounding the Strait of Hormuz and tighter global diesel supplies have increased the risk of higher energy prices, which will continue to put pressure on inflation.
“Should shipping through the Strait of Hormuz remain materially disrupted, keeping international oil prices elevated, local fuel prices could increase further,” it said.
“This would delay the expected moderation in inflation and place additional upward pressure on domestic inflation expectations.”
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