While South African March headline CPI came in slightly below consensus at 5.9%, inflation is expected to breach the South African Reserve Bank’s 6% threshold and prompt further rate hikes.
The major takeaway from the March CPI print is the faster pick up in core inflation, says Jeff Schultz, senior economist at BNP Paribas South Africa.
“Notwithstanding temporary fuel levy reprieve in April and May, which could see CPI temporarily slow towards 5.8% in the following two months, we expect price pressures to prove more challenging by the middle of the year where we anticipate a more protracted breach of the South African Reserve Bank’s (SARB’s) upper 6% target range again from June where we think headline inflation will struggle to come back towards the SARB’s 4.5% midpoint target until H2 2023.”
“This, we believe, could prompt the SARB to step up the pace of hikes from its May MPC meeting, where we expect 50bp hikes in May and July followed by steady, successive 25bp hikes in each meeting thereafter until May next year.”
Schultz added that the current excessive load shedding is unlikely to deter the central bank from acting to ensure the anchoring of inflation expectations at its current 4.5% midpoint. Eskom has warned the country could have more than 100 days of electricity blackouts this year because of outages.
“We, therefore, maintain our call for an end-2022 repo rate of 5.75% and a terminal policy rate of 6.50% achieved by mid-2023. We think that the SARB will be satisfied that it has normalised rates sufficiently without hurting the incipient growth recovery to ensure inflation expectations remain well-anchored at its current 4.5% midpoint target,” Schultz said.
Inflation is expected to moderate later in the year
Headline CPI inflation is expected to track sideways in the next two months before rising above 6% in June, says Miyelani Maluleke, senior economist at Absa CIB.
“Fuel inflation is a key part of this trajectory, and there is a lot of uncertainty about the future path of oil prices. Fuel prices increased by 3.4% month/month in April despite the government’s decision to implement a two-month cut in the fuel levy by R1.50/litre due to the recent surge in oil prices since Russia invaded Ukraine,” Maluleke said.
“However, base effects are set to push fuel inflation slightly lower in April. Meanwhile, data from the Central Energy Fund show an overrecovery of about 35c/litre for petrol but an under-recovery of 72c/litre for low-sulphur diesel, a divergence that we believe is partly explained by the different reference international product prices.”
In weighted terms, the fuel price index in CPI seems set to be about flat in May, against Absa’s previous forecast of a decline. Given this development, along with the slightly higher starting point for CPI going into 2Q22, Absa now expects headline CPI inflation to peak at 6.2% in June, 0.2 percentage points higher than its previous forecast.
“While we expect a strong disinflation effect from fuel inflation thereafter, based on our assumption that oil prices would ease gradually to $108/bbl by the year-end from their current spot of $112/bbl, we forecast that a gradual rise in core CPI and food inflation will offset some of this, leaving headline CPI inflation at 5.5% by the end of the year.
The supply chain shocks that China’s ‘zero-Covid’ lockdowns will likely precipitate are an upside risk to inflation, while the recent excessive rainfall in the eastern parts of the country is a further specific upside risk for food prices.
Consumer confidence is weak
South Africa’s economy also has to wrestle with persistently low consumer confidence, which has not managed to claw its way out of negative territory.
While the FNB-BER Consumer Confidence Index improved significantly from the extreme low of [-33] recorded in the 2nd quarter of 2020 – the quarter of “hard lockdowns” related to the Covid-19 pandemic – the index still languished in negative territory to the tune of [-13] as at the 1st quarter of 2022, which represents a weakening from the prior quarter’s [-9].
The Consumer Confidence Index was launched back in 1982 and has thus seen various highs and lows, including the tough political transition of the early-1990s with its three-year-long recession.
Through all of the ups and downs, the long-term average index reading since 1982 is [-1.2], meaning that the most recent [-13] reading is very weak by historic standards.
According to the BER, what has likely stalled the consumer confidence rebound off the 2020 low is a drop in disposable income and thus consumption expenditure during the pandemic.
Real Household Disposable Income growth was ‘bolder’ toward the final quarter of 2021 as the economy slowly recovered, and the savings rate also increased slightly as consumers opted for caution and spent less over the pandemic period.
However, towards the end of 2021 and heading into 2022, further improvement in the consumer financial situation looked far from assured.
“Two key supporting forces of the household sector financial recovery – i.e., low consumer price inflation and low interest rates – had been starting to turn the ‘wrong’ way from the consumer’s short term financial point of view,” the BER said.
This includes a hiking cycle from the South African Reserve Bank, following an ‘aggressive’ cut of 300 basis points during the pandemic, as well as higher than expected consumer inflation from turmoil in the global marketplace due to Russia’s war in Ukraine.