Consumer inflation rose for the first time in four months in February, partly reflecting rising costs associated with load-shedding and potentially sealing the case for yet another interest rate hike next week.
The Reserve Bank’s monetary policy committee meets next week.
The headline consumer price index (CPI) rose at an annual rate of 7% in February, up from 6.9% in January, Stats SA said in a statement on Wednesday. The Bloomberg median estimate was for an annual rise of 6.8%.
The hotter-than-expected inflation reading is a blow to hard-pressed consumers and businesses, and it complicates the task of the central bank, which has to strike a delicate balance between keeping prices in check without hurting a struggling economy.
Until February, consumer prices on aggregate had been moderating since peaking at the 13-year high of 7.8% last year, boosting hope for an end to the present hiking cycle.
However, the crippling energy supply shortfall added another dimension to the inflation profile in February as the businesses incurred additional production costs for back-up power.
“The breakdown of the data showed that the rise in the headline rate was driven in large part by a worrying pick-up in core price pressures,” said Jason Tuvey, deputy chief emerging markets economist at Capital Economics.
“This could be an early sign that firms are passing on the costs associated with the intensification of electricity outages in recent months.”
The core CPI, which strips out volatile energy and food prices, rose 5.2% year on year, up from 4.9% in January.
But even so, Tuvey expects next week’s 25 basis point (bps) hike to mark the end of the tightening cycle.
As a relatively small and open economy, the SA inflation and rates dynamics are, in part, shaped by global events.
International oil prices and global food prices have retreated significantly, boding well for the outlook on inflation, though a weaker rand partially negates the positive spin-offs.
Inflation in developed markets has also been moderating on the whole, though it is still a long way off the levels targeted by the central banks.
Markets in the US are pricing in a potential cut in rates later in 2023, after the collapse of the Silicon Valley Bank and two other regional US banks.
“Our baseline view is for headline CPI inflation to ease to 6.9% in March before falling back into the target range in June and ending the year at 5%. However, food inflation is one of the biggest sources of uncertainty around this path,” said Miyelani Maluleke, an economist at Absa.
Food prices surged 14% year on year, up from 13.8% in January, Stats SA said. The weaker rand could have added to the rise in food prices, which are at their highest level in 14 years.
“Despite today’s upside surprise, inflation is still expected to trend lower off a higher base throughout the year, falling to 4.8% in December and averaging 5.8% for 2023,” Nedbank economists said in a note.
“Most of drag will stem from fuel prices, which will benefit from lower Brent crude prices, which will be dragged down by slower global demand, particularly consumer spending in the major economies.”
The Bank has hiked rates by a cumulative 375 bps to 7.25% since the hiking cycle began in November 2021, putting businesses and consumers under considerable pressure.
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