SA consumer inflation slowed for the third consecutive month in January, reaching its lowest level since May, but analysts warn that rising food inflation and rand weakness — mainly as a result of dollar strength — will remain upside risks to the Reserve Bank’s local inflation outlook.
While the decline in headline inflation from December’s 7.2% to January’s 6.9% was highly anticipated and in line with market expectations, the reading is still well above the Bank’s 3-6% target range.
Stats SA data on Wednesday also showed that core inflation — which excludes short-term price shocks such as food and fuel prices — stood at a three-month low of 4.9% in January, unchanged from the prior month.
Core inflation came below market expectations of a rise to 5%.
As economists and policymakers welcomed the news of falling SA headline inflation, which they say peaked in July 2022 when it reached a 13-year high of 7.8%, disappointing US inflation numbers — which posted above market expectations, as well as the country’s robust employment numbers — raised the level at which investors expect US rates to peak.
Ninety One portfolio manager Adam Furlan told Business Day US inflation numbers are proving to be slightly more stubborn than anticipated.
“This is likely to take some shine off global risk markets as they serve as a reminder that global central banks are not yet ready to take their foot off the pedal on restrictive monetary policy,” Furlan said.
“The Bank will look through to the impact on the local inflation outlook, which will likely flow from the currency effect of a stronger dollar.”
Furlan added that the weak rand remains an upside risk to the Bank’s inflation profile and that it will pay close attention to second-round effects on inflation from currency weakness.
Stats SA data also shows that the decrease in consumer inflation was mainly a result of a notable fall in the price of fuel.
The fuel price index declined 10.5% in the month between December and January, dragging the annual rate down to 13.1% from 22.8% in December.
A litre of 95 octane petrol purchased in an inland province cost R21.40 in January, roughly at a level last seen in March 2022, when it was R21.60.
But prices in the “food and nonalcoholic beverages” category surprised sharply to the upside, rising 13.4% on an annual basis, the highest level since April 2009.
Bread and cereals also recorded the highest rate of any product group in the consumer price index basket at 21.8%. This is the highest reading for this category since February 2009, when it registered at 23.8%.
Absa chief economist Peter Worthington said rising food inflation, which Absa believed would ease to 12.2% in January after falling to 12.4% in December from a peak of 12.5% in November, will also likely worry the Bank’s monetary policy committee (MPC).
Worthington said even though the MPC will be comforted by the easing headline inflation and steady core CPI inflation, “we believe that they will be worried about the implication of rising food inflation on wage settlements”.
“Rising food inflation along with elevated inflation expectations could be an important driver of upward pressure on wage inflation,” Worthington said.
He said given the ongoing uncertainty, the evolution of data releases and the exchange rate “will be key” ahead of the next MPC meeting in March.
Worthington added that other risk events to watch out for ahead of the MPC meetings include the 2023 budget on February 22, a possible cabinet reshuffle, the Financial Action Task Force’s decision on SA’s greylisting and the US Fed rate decision on March 22.
Other upside risks to inflation include the recently announced 18.65% increase in electricity tariffs, broadly expected to reflect in headline inflation from July; the upward pressure on food prices due to sustained electricity outages; as well as the risk that the reopening of the Chinese economy during 2023 could result in upward pressure on oil and other commodity prices.
Stanlib chief economist Kevin Lings said they have forecast 2023 SA inflation to average a more respectable 5.5%, ending the year at around 5.0%.
“Unfortunately, the risk to inflation is still to the upside. Under these circumstances, the Reserve Bank is expected to continue to increase interest rates in early 2023, albeit at a much more modest pace,” Lings said.
He said Stanlib expects the Bank to start to cut interest rates only in 2024, “especially since they [Reserve Bank] remain committed to getting inflation back down to the midpoint of the inflation target 4.5%”.
Lings said the Bank cannot afford to be complacent in guarding against a broad-based deepening of SA inflationary pressure and are likely to increase interest rates further during early 2023.
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