New inflation data is bad news for food prices in South Africa

Statistics South Africa has published its latest consumer price index, showing that annual consumer price inflation remains above the upper limit of the Reserve Bank’s target range for a fourth consecutive month.

Annual consumer price inflation was 7.6% in August 2022, down from 7.8% in July 2022. The consumer price index increased by 0.2% month-on-month in August 2022.

Consensus among economists polled by Bloomberg was for a rate of 7.5%, while more optimistic analysis from the Bureau for Economic Research pegged the rate at 7.3%.

A more positive angle on the number is that annual inflation has dropped from the figure reported in July 2022, indicating that inflation could start a downward trend, having peaked as some economists projected.

The reality, however, is that the rate remains among the highest readings since May 2009 (8%), and key items in the basket that have the biggest impact on household budgets – food and fuel – are climbing even higher.

The main contributors to the 7.6% annual inflation rate were food and non-alcoholic beverages; housing and utilities; transport; and miscellaneous goods and services.

Food and non-alcoholic beverages increased by 11.3% year on year and contributed 1.9 percentage points to the total CPI annual rate of 7.6%.

Housing and utilities increased by 4% year on year and contributed 1.0 percentage points. Transport increased by 21.2% year on year and contributed 2.9 percentage points. Miscellaneous goods and services increased by 3.7% year-on-year and contributed 0.6 of a percentage point.

In August, the annual inflation rate for goods was 10.9%, down from 11.5% in July; and for services, it was 4.3%, up from 4.2% in July.

What costs more?

Inflation is still being driven by rising food and fuel prices, with food inflation hitting even higher in August at 11.5% (up from 10.1% in July).

Oils and fats and bread and cereals are again the biggest cause of higher food inflation. The former climbed higher to 37.6% (up from 36.2% in July), while the latter jumped to 17.8% (up from 13.7% in July).

However, it’s almost the entire food basket that has seen higher inflation: vegetables, sweets, beverages, and both processed and unprocessed foods are all more expensive.

The only food categories to come down slightly are fish and meat products – but these remain far outside the target band at 9.2%.

A similar case is made for fuel inflation, which has eased to 43.2% (from 56.2% in July) but remains the highest item in the inflation basket.

High fuel inflation has a knock-on effect on things like public transportation costs, which also climbed higher in August to 23.6%.

The list below shows which basket items are above August’s inflation number and those which fall outside the target band.

• Fuel: +43.2%
• Oils and fats: +37.6% 
• Public transport: +23.6%
• Bread and cereals: +17.8%
• Processed food: +14.9%
• Hot beverages: +11.8%
• Other food: +10.1%
• Vegetables: +9.3%
• Fish: +9.2% 
• Meat: +9.2% 
• Sugars, sweets and desserts: +9.2%
• Unprocessed food: +8.4%
• Electricity and other fuels: +8.4%
• Spirits: +8.1%
• Cold beverages +7.1%
• Restaurants: +7.0%
• Other running costs for transport: +6.8%
• Personal care: +6.1%

Impact on rates

The slight drop in inflation for August is unlikely to sway the South African Reserve Bank’s Monetary Policy Committee’s rate hike cycle, with most economists expecting a 50 basis point or 75 basis point hike on Thursday.

The extent of the rate hike hinges on the announcement from the US Fed today about its rate hikes, with most analysts saying a 75bps hike is all but cemented in, following weaker than expected inflation data published last week.

Worries over unanchored inflation expectations and increased depreciation pressure on the rand will probably see the SARB raise its key rate for a sixth straight meeting, said Sanisha Packirisamy, an economist at Momentum Investments.

Governor Lesetja Kganyago said in a recent interview that the central bank must do whatever it takes to ensure price growth is under control and on a downward trajectory toward the 4.5% midpoint of the monetary policy committee’s inflation-targeting range. Inflation has been above 4.5% since April 2021.

All the economists polled by Bloomberg expect the MPC to raise its benchmark to 6.25% from 5.5%, in what would be the first time it hiked rates by 75 basis points at consecutive meetings. Traders are fully pricing in an increase of that magnitude but see a chance of a bigger move.

Read: D-Day for Fed rate announcement has the battered rand on the ropes