Inflation came in worse than expected in June, raising fears that higher fuel and food prices might now feed into more generalised price pressures across the economy, further pressing the Reserve Bank to up the pace of interest rate hikes.
Official figures showed consumer price inflation reached a 13-year high of 7.4% in June, well above May’s 6.5% and ahead of the 7.2% market consensus and the 7.3% forecast by Bloomberg.
The headline number, the highest since May 2019 when inflation reached 8%, also marks the 14th consecutive month in which inflation has been higher than the midpoint of the Reserve Bank’s 3%-6% target range.
The consumer price index (CPI) reading comes as the market waits for Thursday’s interest rate decision by the Reserve Bank’s monetary policy committee (MPC), which is expected to increase the benchmark repo rate by at least 50 basis points (bps) from 4.75% to 5.25%, according to a Reuters poll.
Stats SA data showed transport costs rose 20% in June from 15.7% in May, adding 2.7 percentage points to the headline figure. Within transport, the most significant driver was the petrol price, which rose by another hefty 45.3%.
The food and nonalcoholic beverages index increased by 8.6%, contributing 1.5 percentage points, with prices in all the subcategories rising. The most upward pressure came from oils and fats, which jumped 32.5%.
Stats SA said that significant inflationary pressure came from housing and utilities.
The jump of 5.1% in June mainly emanated from significant increases in electricity and other fuels as well as actual and owner’s equivalent rent — which reflected the effect of recent interest rate hikes.
Stats SA said core inflation, which excludes food and fuel prices, continued to trend higher and came closer to the midpoint of the Reserve Bank’s target range at 4.4% in June, the highest since March 2019.
Old Mutual Investment Group chief economist Johann Els said that even though the MPC began its deliberations on Tuesday, with its models and input concluded before the headline inflation number, the latest consumer inflation may “still shift [its] thinking” by the conclusion of the meeting.
“Given more generalised price pressures, there is now a higher probability of a 75bps rate hike compared to the earlier base case of only 50bps,” Els said.
SA is also experiencing high price pressures at the production level, with producer price inflation at 14.7%, creating an environment that does not provide for a rapid deceleration in domestic inflationary pressures.
The local inflation numbers are in line with international trends, with the US headline CPI reaching a 40-year high in June. Policymakers at the Federal Reserve are set to meet next week and they are expected to remain hawkish, increasing rates by a further 75bps or an even more aggressive 100bps on July 27.
SA’s interest rates tend to follow higher US interest rates — not necessarily by the same quantum but typically the same direction to avoid rand depreciation and the pressure this would put on domestic inflation.
Stanlib chief economist Kevin Lings said the recent weakening of the rand — which breached R17/$ last week — is likely to add to the upward pressure on consumer prices.
There is further evidence to suggest that the weaker exchange rate is starting to push some categories of SA inflation higher, Lings said.
Standard Chartered chief economist Razia Khan said that given the weaker rand, the Reserve Bank is less able to protect SA from imported inflation “and there are expectations of a large 75bps rate hike from the Fed in July, which may raise the pressure on the Reserve Bank to tighten even faster.
“Our call is still for a 50bps rate hike at this week’s meeting, though there are risks given the bank’s concerns over wage demands,” Khan said.
“We see potentially a 3-2 split in the vote, with a minority of MPC members favouring a larger rate increase.”
Virag Forizs, emerging-markets economist at Capital Economics, said the latest inflation print will fuel monetary policymakers’ inflation concerns. She said a larger 75bps hike at the MPC meeting remains on the table even though a 50bps hike is expected.
“It will certainly be a close call,” Forizs said.
Bureau for Economic Research (BER) chief economist Hugo Pienaar said the BER has an out-of-consensus view for a 75bps increase this week, citing the more aggressive stance from several central banks since May, the weaker rand and an expected significant upward adjustment to the Bank’s inflation forecast.
“The MPC could be more aggressive than is generally expected. In fact, though not our baseline, we do not completely rule out the possibility that the bank could hike by 100bps this week,” Pienaar said.
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