When punch-drunk consumers in South Africa can expect to catch a break

Fuel and food inflation is expected to abate about mid-way through 2023, says Miyelani Malulek, macroeconomics researcher at Absa. Until then, pricing pressure is expected to remain elevated until the end of the year, before slowly dropping back to targeted ranges.

In the latest Absa Quarterly Perspectives for Q4, the bank’s researchers found that while headline CPI inflation peaked at 7.8% in July, the descent back into the SARB’s target range of 3-6% could take time as fuel and food disinflation partially offset by rising core inflation.

The August and September recordings of headline CPI inflation eased only slightly as falling fuel inflation was partially offset by rising core and food inflation.

Malulek said that in relation to other countries, rising inflation in South Africa is mainly driven by fuel and food prices and a handful of outside pressures.

It is difficult to predict the exact time that inflation will ease, the researcher said, as it is a complex function of various factors that pull and push in a very uncertain environment.

Despite this, Absa believes some deflation should be on the horizon.

Food prices have been rising in response to higher grain prices after Russia’s invasion of Ukraine. However, these prices are slowly decreasing. Absa predicts that food inflation should top out in November at 12.1% y/y, but core CPI will continue to rise into early 2023.

This food inflation top-out will be due to lagged effects of sharply higher crop prices earlier in the year. Globally, food price inflation seems to have peaked already, said Absa.

The FAO global food price index reveals that inflation eased to 5.5% y/y in September, down from the recent peak of 34.0% in March, boding well for local food price dynamics.

Despite global food price inflation easing in September, it is not in the clear just yet – white maize and wheat prices on the futures exchange have risen recently, leaving them up 6.8% and 23.1% between 18 August and 24 October, respectively.

Absa believes the suspension of anti-dumping duties on chicken imports for 12 months starting August this year – alongside good maize harvests locally – should blunt food inflation.

The graph below illustrates the rand wheat price alongside bread and cereals CPI, showing an expected sharp peak in late 2022:

“This should offset some of the disinflationary effects of lower fuel price inflation, which we expect to fall from 56.2% y/y peak in July to 19.2% y/y in December 2022, shaving off 1.8pp from headline CPI inflation over this period,” reported Absa.

The banking group assumes that the price of Brent crude will ease to $89 per barrel by the end of 2024, with headline CPI inflation easing back between 3% and 6% inflationary targets halfway through next year.

The graph below illustrates the food inflation compared to fuel inflation since 2020 and into predictions for late 2022 and beyond:

“Overall, we forecast that headline CPI inflation will average 7.2% in Q4 22 and 5.3% in 2023,” said Absa.

The banking group forecasts that core inflation will continue to rise into early 2023 due to the second-round effects of the initial fuel and food price shocks, which have pushed up firms’ input costs and lifted workers’ wage demands.

However, there is some uncertainty about when exactly core CPI inflation will peak and at what level.

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