It should all be downhill from here

 ·25 May 2023

Economists and analysts say that the latest drop in consumer price inflation (CPI) should signal a downward trend, taking South Africa back into the range targetted by the central bank.

Stats SA reported CPI at 6.8% in April 2023, down 0.3 percentage points from the surprise jump recorded in March (7.1%).

The drop, while marginal, came in better than market expectations, primarily thanks to softer fuel inflation and the subsequent knock-on effect on transportation.

Food inflation remains unsustainably high at 13.9%, but even this is showing signs of easing, having come off a 14-year high at 14%.

According to economists at Nedbank, while rising core inflation – inflation excluding food and fuel – remains a concern, the overall expectation is that inflation will continue to trend lower in the coming months.

Core inflation increased to 5.3%, indicating that the journey to the SARB’s target band may be slower. However, the expectation is that the country will get there and not reverse into higher levels.

“Lower fuel prices will be the main drag as they benefit from lower crude oil prices. Food inflation has probably peaked and should also begin trending down, helped by the moderation in global food prices and higher local crop production due to favourable weather conditions,” the group said.

This sentiment was echoed by Adriaan Pask, CIO at PSG Wealth, who said that an expected interest rate hike on Thursday (25 May) will likely assist in accomplishing this.

“While local inflation is still above the upper limit of the South African Reserve Bank’s target range of between 3% to 6%, we expected it to start decreasing as the SARB hiked interest rates to combat high inflation,” he said.

As with most economic data points, however, there are still risks to the environment.

Nedbank said that a key risk – which could see CPI recede at a slower pace than expected – is the rand.

“The biggest concern is the rand, which could to remain under pressure given volatile global risk sentiment and unfavourable domestic factors, including worries about persistent load-shedding, poor growth prospects and political noises ahead of the 2024 elections,” the bank said.

“This will limit the benefits of lower global commodity prices.”

The bank also warned that production costs will also rise as persistent load-shedding is forcing companies to generate power from diesel and forcing the producers to continue passing part of the cost pressures onto consumers.

“Our base view is that the pass-through will be limited by lower consumer spending, which, together with a poor growth trajectory and the lower inflation outcome, will convince the SARB to hike the interest rates by a smaller margin of 25 basis points, taking the prime and repo rate to peaks of 8% and 11.5%, respectively.”

However, the bank has not written off the possibility of a 50 basis point hike. But even this should mark a turning point, it said.

“We believe that tomorrow’s hike will be the last in the current cycle, and will be followed with steady rates for the remainder of the year. The easing cycle is likely to begin in the first quarter of 2024,” it said.

Read: Finally some good news for inflation in South Africa

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