SA’s annual inflation rate eased further in May, reaching a 13-month low and moved closer to the upper limit of the Reserve Bank’s 3%-6% target range, thanks to slowing food and transport prices, Stats SA said on Wednesday.
Headline consumer inflation cooled for a second consecutive month in May, to 6.3% from 6.8% in April. That’s the lowest level since April 2022 when the rate was 5.9%.
Headline inflation breached the Bank’s 3%-6% upper target in May 2022, posting at 6.5%, and reached a 13-year high of 7.8% in July that year, driven by various factors including elevated fuel prices, supply chain pressures, a weak exchange rate, power outages, an accommodative macroeconomic policy and high global inflation.
The conflict in Ukraine also led to an increase in commodity prices, pushing headline inflation higher. Goods inflation surged to a peak of 11.5%, as a result, before declining gradually.
While still above the upper end of the Bank’s target range, the May reading was below Thomson Reuters expectations of 6.5%.
NWU economics professor Raymond Parsons said the overall downward trend in headline inflation is converging on earlier consensus expectations the country will get closer to the goal of price stability in the months ahead.
“The lower inflation reading is welcome but not unexpected. However, core inflation remains stubborn for now,” Parsons said.
Stats SA data shows that annual core inflation, which excludes prices of food, non-alcoholic beverages, fuel and energy, eased to 5.2% in May, from a more than six-year high of 5.3% in April, in line with market forecasts.
Stanlib chief economist Kevin Lings said while core inflation has been inside the target for the past 25 months, it’s been trending higher over the past 18 months and stubbornly above the midpoint of the target (4.5%) for the past 9 months — “with the risks weighted to the upside”.
“These risks include the potential for a continued upward bias in wages increase, the pending 18.65% increase in electricity tariffs, continued cost pressures due to electricity outages as well as the weaker and volatile exchange rate — especially the weakness in the exchange rate during May 2023,” Lings added.
Nedbank senior economist Johannes Khosa said that given the many uncertainties surrounding the inflation outlook, especially the rand’s murky prospects amid persistent geopolitical risks and the US Federal Reserve’s hints of further rate hikes, the Reserve Bank is likely to remain hawkish and hike rates by 25 basis points in July.
The FTSE/JSE All Share Index lost almost 1% after the release of the inflation data, the rand strengthened 0.16% to R18.35/$, 0.07% to R20.05/€, and 0.73% to R23.35/£ at 10.30am, while the two-year government bond yield was recorded at 7.57%, and the five- and 10-year yields fell to 9.43% and 10.80%.
PSG Wealth CIO Adriaan Pask said while local inflation is still above the upper limit of the Bank’s target range, they expect the rate to start falling as the interest rates hikes filter though to the economy.
“According to Bank’s monetary policy review, the country’s inflation levels should reach the target range in the second half of this year, and current data does support this expectation,” Pask said.
The rand has put in an performance in June, recovering more than R1.50 against the greenback, and completely reversing the significant losses witnessed in May, said Casey Delport, an investment analyst at Anchor Capital.
Though it may be difficult to foresee any further strengthening of the rand from current levels, “any further appreciation would naturally significantly impact the inflation outlook for the better and encourage investors back to SA bonds”, Delport added.
Stanlib expects inflation to average 6% and end the year around 5.3%. FNB said their data points to an extended deceleration in headline inflation to 5.6% in June.
Oxford Economics Africa economist Jee-A van der Linde expects inflation to average 6.1% in 2023.
“What’s more, the impact of a weak rand exchange rate, relatively high fuel prices together with power outages are keeping costs elevated for businesses in general,” he said.
He added that with previous rate increases yet to fully filter through to the real economy, and inflation forecast to return to the Bank’s target band by the end of the first half of this year, “additional interest rate increases could be too restrictive”.
“Although further tightening will not boost the rand, our base case is for a further 25 bps rate increase in the third quarter, pushing the repo rate to 8.5%,” he said.
Update: June 21 2023
This article has contains new information and comment.
zwanet@businessliv.co.za
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