Domestic inflation could surprise higher in the coming months if the hostilities in Ukraine continue to intensify or if oil and gas supplies are additionally constrained, says the South African Reserve Bank (SARB).
Commenting in its Monetary Policy Review document for April, the central bank said the upward drift in inflation expectations and sharply higher producer prices further tilt the inflation risk to the upside.
“Higher expected wage growth, a somewhat weaker rand and further advances in global goods prices could exert additional upward pressure on headline inflation.”
Robust demand, supply chain and logistical difficulties have also exerted upward pressure on prices, the central bank said.
“The strong demand for goods has further supported higher oil prices, with geopolitical tensions in Eastern Europe providing the additional impetus. This has driven noncore inflation higher. Meanwhile, the strong demand for goods has given sellers room to pass through some of the cost increases to end-users.
“Consequently, consumer inflation for various countries reached multi-year highs towards the end of 2021 and is expected to remain above central bank targets over the medium term.”
The SARB noted that South African manufacturers are experiencing difficulties replenishing inventories and equipment because of raw material shortages and bottlenecks at ports.
This is evidenced by order delivery times of manufactured goods which have increased sharply since the second half of 2020, it said.
“Supply-related prices have risen markedly, leaving manufacturers reeling. Despite low pass-through to date, the elevated producer prices could shape the future trajectory of consumer price inflation.”
Some moderation expected – but other issues remain
With core inflation gathering pace, and fuel and food prices markedly higher, headline inflation has accelerated.
“Looking ahead, while fuel and food prices should moderate, the closing output gap and higher imported inflation are expected to exert upward pressure on headline inflation.
“The Russia–Ukraine conflict has added additional price pressures to both oil and food, and elevated uncertainty around the inflation forecast trajectory,” the SARB said.
Over the longer-term, higher inflation is associated with lower growth and higher unemployment, and worsens wage inequality in South Africa, it said. Low and stable inflation, on the other hand, promotes economic growth and protects the real consumption of households, particularly those living on grants or pension income.
“The attainment of low and stable inflation is necessary, but not sufficient, to achieve faster economic growth. Low inflation should be complemented by structural reforms that seek to provide sufficient energy for growth, reduce product and labour market regulation, lower the impact of administered prices on overall inflation, and further de-risk the economy by stabilising public debt.
“These reforms will bring about more dynamism in the economy, underpin low domestic inflation and permanently reduce borrowing costs.”