Inflation eased in July in line with expectations as flat food prices and slower fuel price increases outweighed pressure from a sharp jump in electricity tariffs.
Though the price of petrol rose again in August and the effect of the recent unrest may add a further “upward bias” to inflation, these factors not expected to force the SA Reserve Bank to raise interest rates in the near future, according to economists.
This is in line with recent comments from governor Lesetja Kganyago, who told an online event that the Bank is not anxious about inflation breaching its target range of between 3% and 6%.
This is in a context where SA’s economic recovery has met with a spate of shocks. such as the recent unrest that gripped KwaZulu-Natal and Gauteng and an explosion at Eskom’s Medupi power station.
“We just keep on having all these shocks, but the trajectory for inflation is not leaving us anxious,” Kganyago said. “Should inflation threaten to break our target, we will not hesitate to deploy our tools. But ... we think that inflation and the expectations of what future inflation is going to be is well contained.”
Data from Stats SA on Wednesday showed that in July consumer price inflation — as measured by the annual change in the consumer price index (CPI) — eased to 4.6% year on year from June’s 4.9%. This was slightly lower than the median forecast of economists polled by Bloomberg of 4.7%.
Food and nonalcoholic beverage price increases stayed steady at 6.7%, in line with June’s figure.
Fuel prices increased 15.2% year on year. However, this was a sharp decline from June’s rate of 27.5%, as base effects introduced by the plummet in fuel prices during the 2020 Covid-19 onslaught have begun wearing off.
Municipalities typically increase service charges in July and August with the beginning of the municipal financial year, Stats SA noted. Though water charges increased by less than last year, hikes for electricity and assessment rates were higher than in 2020 — with electricity rising 13.6% in July, according to the agency.
After a petrol price hike of 91c/l in August, the annual rate of fuel inflation is likely to rise 20% year on year, adding upward pressure to SA inflation over the coming months, said Stanlib chief economist Kevin Lings.
The recent unrest — which saw the destruction of shops and warehouses, and major transport corridors shut down — may add “some upward bias but whether it will show up very noticeably in the inflation data is hard to say”, said Lings.
Despite concerns around food, fuel and electricity prices, “underlying inflation remains well contained”, he said.
Fears that July’s civil unrest would push inflation upward did not seem to materialise, despite supply chain disruptions, which caused food and fuel shortages, Virág Fórizs, Africa economist at Capital Economics, said in a note.
SA’s weak economic recovery is likely to keep inflation subdued, according to Fórizs, and against this backdrop “interest rates will remain on hold for longer than investors currently anticipate”.
But NKC African Economics analyst Pieter du Preez said the recent riots could still pose an upside risk to inflation after the disruption to supply chains, while “the loss of milk, eggs, vegetables and yeast production could drive food prices higher”.
On Wednesday Stats SA also released retail sales figures for June, showing a 10.4% increase year on year, down from a revised 16.3%.
In the near term retail sales should continue showing “abnormally large year-on-year growth swings due to 2020s base effects, although at a diminished rate,” said FNB senior economist Siphamandla Mkhwanazi.
“However, the third wave of Covid-19 infections and the subsequent implementation of harsher lockdown restrictions likely curtailed retail sales performance in July,” Mkhwanazi said.
With Karl Gernetzky
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