Overall, the cost of living in South Africa is going up and the South African Reserve Bank (SARB) will be required to respond by raising rates, say analysts at financial services firm Alexander Forbes.
Commenting on the latest Consumer Price Inflation (CPI) data published by Statistics South Africa on Wednesday, the firm cautioned that the factors driving inflation are likely to remain in place and keep it elevated for some time to come.
The SARB projects four increases of 25 basis points each in the repo rate in 2022 and 2023, as of its November 2021 Monetary Policy Committee (MPC) meeting.
“That is a 2% cumulative increase by the end of 2023. This implies that home loans, vehicle instalments, credit cards, overdrafts will cost more.
“However, we believe the hiking cycle will be gradual given the lacklustre economic growth backdrop and weak demand-pull inflation with limited second-round inflation pressure,” Alexander Forbes said.
The rise in inflation has primarily been fuelled by higher food and fuel costs coupled with supply constraints and the Covid-19 related base effect of 2020, the group said.
Oil prices have been rising, while the USD/ZAR has been relatively stable, thus pushing the petrol price and transportation costs up, Alexander Forbes said.
“The spike in headline inflation was mainly driven by the significant 40.5% y/y surge in fuel prices in December 2021, after rising by 34.5% y/y in the previous month,” it said.
Investec chief economist Annabel Bishop noted transport inflation rose from 15% y/y in November to 16.8% y/y in December, as petrol prices rose by 75c/litre.
“While there was a 68c/litre cut in January, a huge increase of around R1.30/litre is building for February on the back of a rising global oil price. Brent crude oil price has reached $87.5 a barrel from closer to $73.5 a barrel a month ago,” she said.
Growth in food and non-alcoholic beverages inflation was steady at 5.5% y/y in December 2021 the same as in the previous month but remained quite elevated. Overall, food inflation eased further to 5.9% y/y in December 2021 from 6.0% y/y in November 2021 dropping further from the August 2021 peak of 7.4%.
Food prices have risen quite sharply in the last year to an average of 6.4% in 2021 from 4.8% y/y in 2020 as supply chain constraints added pressure on global food prices that are driven by drought conditions from South America.
Rent and utilities
Other significant contributors to the headline CPI print came from the annual growth in housing and utilities, which rose by 4.2% y/y in December 2021 after easing to 3.9% y/y in the previous month.
The main contributor to the higher housing and utility inflation is attributable to the rise in owner’s equivalent rent inflation, which increased to 1.9% y/y in December 2021 from 1.3% in November 2021.
Notably, rental inflation has been persistently weak for a long time and below the 4.5% midpoint since June 2018, suppressed by poor demand, implying a protracted recovery towards normalisation.