{"id":674691,"date":"2023-03-23T16:12:37","date_gmt":"2023-03-23T14:12:37","guid":{"rendered":"https:\/\/businesstech.co.za\/news\/?p=674691"},"modified":"2023-03-23T16:12:37","modified_gmt":"2023-03-23T14:12:37","slug":"why-inflation-is-moving-in-the-wrong-direction-in-south-africa","status":"publish","type":"post","link":"https:\/\/businesstech.co.za\/news\/business\/674691\/why-inflation-is-moving-in-the-wrong-direction-in-south-africa\/","title":{"rendered":"Why inflation is moving in the wrong direction in South Africa"},"content":{"rendered":"

Inflation will likely be higher for longer as rising food costs and higher medical aid prices filter through the data in the coming months.<\/span><\/p>\n

Consumer price inflation and core inflation rose in February against market expectations and after <\/span>easing for three consecutive months, Stats SA reported this week.<\/span><\/p>\n

This higher number came amid price pressures stemming from medical aid and food inflation, in particular.<\/span><\/p>\n

According to Momentum Investment economist Sanisha Packirisamy, these were the two main culprits in the figures, warning that medical inflation would also likely come into play for April’s numbers.<\/span><\/p>\n

Core inflation grew to 5.2% YoY from 4.9% in February 2022 \u2013 marking the highest rate since February 2017.<\/span><\/p>\n

According to Momentum, this is mainly due to higher services inflation \u2013 including medical aid inflation. In February, medical<\/span>\u00a0insurance shot up to 7.5% YoY, above the upper <\/span>inflation target, from 4<\/span>.<\/span>8<\/span>%<\/span>\u00a0 YoY\u00a0in<\/span> January<\/span>.<\/span><\/p>\n

\"\"<\/a><\/p>\n

Packirisamy explained that this is because medical insurance has been low since February 2021, when medical schemes implemented small rate increases to help consumers<\/span> cope with the impact of <\/span>the<\/span> Covid<\/span> pande<\/span>mic.<\/span><\/span><\/p>\n

Various medical aids have now <\/span>announced higher increases for 2023<\/span>,<\/span> which ha<\/span>ve<\/span> led to <\/span>higher<\/span> medical aid<\/span> inflation.<\/span><\/p>\n

However,<\/span> the three <\/span>largest schemes (Discovery, Bonitas and Momentum <\/span>Health) have deferred increases to April 2023<\/strong>. As such, <\/span>medical insurance<\/span> will<\/span> likely<\/span> rise again<\/span> in April \u2013 leading to stubborn inflation levels in the future.<\/span><\/p>\n

Stats SA typically only measures medical aid inflation twice a year (in February and April), so the April increases will likely feed through to the data for that month.<\/p>\n

Short<\/span>–<\/span>dated inflation expectations<\/span><\/strong><\/p>\n

Due to the inflation risks that have materialised so far in 2023, such as<\/span> a<\/span> weaker domestic currency and higher food <\/span>inflation, inflation expectations have been raised upwards, noted Momentum.\u00a0<\/span><\/p>\n

According to the Bureau for Economic Research (BER), inflation expectations for 2023 <\/span>increased from an average of 6.1% in the 2022 fourth<\/span>–<\/span>quarter survey to 6.3% in the survey conducted in the <\/span>first quarter of 2023.<\/span><\/p>\n

\"\"<\/a><\/p>\n

Furthermore, the expectation for <\/span>average inflation in 2024 also increased from 5.6% to <\/span>5.8%.<\/span> These outcomes were higher than the SA<\/span> R<\/span>eserve <\/span>B<\/span>ank<\/span>\u2019s<\/span> (SARB)<\/span> forecast of 5.4% for 202<\/span>3 and 4.8%<\/span> for <\/span>2024<\/span> communicated<\/span> in the January 2023 MPC<\/span> forecasts<\/span>.<\/span><\/p>\n

Longer<\/span>–<\/span>dated inflation expectations (five years) increased <\/span>slightly<\/span> from an average of 5.4% to 5.5% within the inflation\u00a0target range. <\/span><\/span><\/p>\n

The stable long<\/span>-term expectation, although elevated, is encouraging because it signals that <\/span>participants do not expect the prevailing risks to <\/span>inflation to be persistent in the long run. <\/span><\/span>Th<\/span>is may also <\/span>be interpreted as the SARB successful<\/span>ly<\/span> communicating <\/span>the intention of bringing inflation down toward the <\/span>midpoint (4.5%), said Packirisamy.<\/span><\/span><\/p>\n

Inflation\u00a0<\/strong><\/p>\n

According to Statistics South Africa (Stats SA), <\/span>consumer price inflation (<\/span>CPI) rose to 7% year-on-year (YoY) in February, slightly up from 6.9% YoY in January and against market expectations of 6.9%.\u00a0<\/span><\/p>\n

Transport, housing and utilities, and miscellaneous goods and services all contributed to the rise in inflation, said Packirisamy.<\/span><\/p>\n

Transport increased by 9.9% YoY, followed by miscellaneous goods and services (6.1%) and housing and utilities (4%) \u2013 contributing 1.4%, 1.0%, and 0.9% to headline CPI, respectively.<\/span><\/p>\n

However, Packirisamy added that food inflation was the main driver behind heightened inflation \u2013 hampered by fuel prices, relentless load shedding, and a weaker rand \u2013 among other local and global factors.\u00a0<\/span><\/p>\n

Food and non-alcoholic beverage (NAB) inflation has rocketed to a 14-year high at 13.6% in February \u2013 more than double the upper inflation target limit, contributing 2.3% to headline inflation.\u00a0<\/span><\/p>\n

\"\"<\/a><\/p>\n

The surge in food and NAB is due to several factors, including load shedding, unfavourable weather conditions, animal diseases, geopolitical conflict and the exchange rate, said Packirisamy.<\/span><\/p>\n

Food constraints<\/b><\/p>\n

According to Momentum, the two most considerable price pressures come from bread & cereals and meat inflation. Bread & cereals recorded the highest rate of 21.8% in February, while meat inflation rose to 11.2%.<\/p>\n

This meant that the contribution from bread and cereals to headline inflation increased the <\/span>most, from 0.05% in January 2022<\/span> to 0.6<\/span>5<\/span>% in February <\/span>2023, followed by the meat category, increasing from<\/span> a contribution of<\/span> 0.45% to<\/span> 0.6<\/span>2<\/span>% over the same <\/span>period.<\/span><\/p>\n

The increase in bread and cereals has been fueled by higher wheat prices and the depreciating rand against the US dollar, said Packirisamy.<\/p>\n

She added that there is also a<\/span> gradual<\/span> switch from maize production to soy <\/span>production, which could increase maize prices<\/span> as supply decreases<\/span>,<\/span> placing upward pressure on food pric<\/span>es.<\/span><\/span><\/p>\n

Additionally, according to Agrimark Consulting,<\/span> maize crops are <\/span>affected by i<\/span>rrigation disruptions due to load shedding, <\/span>which leads to lower production<\/span>.<\/span><\/p>\n

Despite this, given that South Africa is a large<\/span> wheat importer, <\/span>the weak currency remains the biggest constraint to <\/span>lower prices of bread and cereals, said Packirisamy.<\/span><\/span><\/p>\n

Regarding meat products, Agrimark Consulting <\/span>noted that the foot-and-mouth disease outbreak last year mainly <\/span>affected cattle<\/span> hence the increase in beef prices. Chicken\u00a0prices will also trend higher because load shedding <\/span>leads to ventilation disruptions<\/span> and, thus, lower <\/span>production.\u00a0<\/span><\/p>\n

Given the upward price pressure on the two most significant <\/span>contributors to food inflation,<\/span> food and NAB inflation is expected to remain <\/span>elevated, said <\/span> Packirisamy.<\/span><\/span><\/p>\n

Fuel prices and load shedding\u00a0<\/strong><\/p>\n

At the end of February 2023, the Central Energy Fund (CEF) announced fuel increases of R1.27\/l in <\/span>petrol and 30.4 c\/l in diesel in March – despite <\/span>international oil prices remaining broadly unchanged in <\/span>February – thanks to a weaker rand.\u00a0<\/span><\/p>\n

However, as of 23 March, the latest data from the CEF shows that the under-recovery in petrol prices seen at the middle of the month is now flat \u2013 while diesel is still on track for a sizeable cut of around 56 c\/l.<\/p>\n

\"\"<\/a><\/p>\n

Although fuel prices have been decreasing<\/span>, they are still high and pose a risk to<\/span> food inflation. Retailers are incurring exorbitant diesel costs to operate generators during load shedding, said Momentum.\u00a0<\/span><\/span><\/p>\n

So far, Shoprite has reported the highest <\/span>cost of R93 million per month<\/span> in the second half of 2022, <\/span>and they estimate to spend R1 billion per year if the <\/span>current rate of usage continues. Other large<\/span> companies <\/span>are also spending millions per month on diesel, including Pick n Pay, which saw costs rise to R60 million.<\/span><\/p>\n

These retailers indicated <\/span>that it would be challenging to hold off passing on<\/span> the <\/span>cost of diesel to consumers through higher food prices if <\/span>diesel costs remain high and there is no support from the <\/span>government.<\/span><\/p>\n

This comes after the 2023 National Budget <\/span>ext<\/span>ended the diesel fuel levy refund to food <\/span>manufacturers<\/span> only, not including retailers.<\/span><\/p>\n

As a result, food prices remain elevated, and retailers warned this would also mean that food security <\/span>and the supply of medication are threatened, noted Packirisamy.<\/span><\/p>\n

\n

Read: IMF slashes South Africa\u2019s GDP growth forecast for 2023<\/a><\/strong><\/p>\n","protected":false},"excerpt":{"rendered":"

Higher inflation could be sticking around for longer, economists warn.<\/p>\n","protected":false},"author":10,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[9872],"tags":[26,3137],"class_list":["post-674691","post","type-post","status-publish","format-standard","hentry","category-business","tag-headline","tag-momentum-investments"],"_links":{"self":[{"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/posts\/674691","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/users\/10"}],"replies":[{"embeddable":true,"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/comments?post=674691"}],"version-history":[{"count":7,"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/posts\/674691\/revisions"}],"predecessor-version":[{"id":674875,"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/posts\/674691\/revisions\/674875"}],"wp:attachment":[{"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/media?parent=674691"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/categories?post=674691"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/tags?post=674691"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}