Consumer inflation fell even more in July, reaching the lowest level in two years, suggesting the Reserve Bank may leave rates unchanged at its next meeting.
At 4.7%, headline inflation is moving further within the Bank’s 3%-6% target range, where it is expected to remain as weaker domestic demand erodes companies’ pricing power and will make it more difficult for firms to pass on a range of price pressures to consumers.
Stats SA on Wednesday said the fall — from June’s 5.4% and below Reuters’ consensus of a 5% reading — was helped by a slight decline in the fuel price, a softening of food price increases, a decline in the price on nonalcoholic beverages, a moderation in health inflation, a drop in the cost of public transport, and a fall-off in the cost of hotel accommodation.
On a monthly basis, headline inflation rose by a significant 0.9%. This was largely due to a 14.2% increase in the price of electricity and a 1.3% increase in the cost of vehicles.
Data analysis shows food inflation moderated further in July, from 11.1% year on year in June and a recent peak of 14.4% in March 2023 to 10% in July.
Standard Bank’s head of economic research, Elna Moolman, said they expect an ongoing moderation in the coming months, “though the trajectory will be sensitive to movements in the rand exchange rate as well as the intensity and impact of the forecast El Nino weather event”.
Stats SA shows transport costs fell 2.6% on an annual basis, dragged down by fuel prices, which fell sharply by 16.8% year on year off a higher base. Fuel prices surged by a record 56.2% in July last year when the impact of the Russian war on Ukraine pushed the oil price to historic highs.
Agency data also shows core inflation, which excludes prices of food, nonalcoholic beverages, fuel and energy, reached a 10-month low of 4.7% in July 2023 from 5% in the previous month and below market forecasts of 4.9%.
Old Mutual Group chief economist Johann Els said the core inflation number is especially good news as it is markedly lower than the Reserve Bank’s forecast. Els said while the Bank does not publish monthly forecasts, their quarter-three core inflation forecast is 5.4%.
“With a third quarter start of 4.7%, core inflation needs to average 5.8% in August and September to reach their [the Bank’s] 5.4% average forecast, which is highly unlikely given what we already know of pipeline prices,” Els said. He said they expect the Bank to “sharply cut” its core inflation forecast when it meets in September.
“This reinforces my view that there will not be any further rate hikes in this cycle — despite risks around rand and oil prices. Rates will likely remain unchanged until the first quarter of 2024, when they will be cut.”
While core inflation has been inside the Bank target range for the past 27 months, at 4.7% it has hovered above the midpoint of the target of 4.5% for the past 11 months.
Stanlib chief economist Kevin Lings said the July number is extremely welcome and, as such, they also expect the Bank to keep rates unchanged even as some upside risks to inflation persist.
“These include the potential for a continued upward bias in wage increases, another large increase in fuel prices in September, the second-round effects of the large electricity price increase, and the impact of rand weakness,” Lings said.
FNB senior economist Koketso Mano said FNB’s inflation model indicates that headline inflation could lift to 4.9% in August.
Mano said the slowing in inflation closer to the 4.5% target should support lower inflation expectations over time.
“Also, restrictive monetary policy appears to be having the desired effect. The demand and supply of credit should continue to slow,” Mano said.
But Mano warned that a resilient US economy continues to be a risk as it could push the Fed to hike rates further before the end of the year.
“This, along with more adverse risk sentiment should China’s prospects not improve and SA’s fiscal outlook worsen, suggests that local rates remain restrictive going into 2024, when potential easing comes into the narrative,” she said.
Anchor Capital investment analyst Casey Delport said the inflation outlook will be vulnerable to new shocks including renewed uncertainties surrounding Russia’s decision to end implementation of the Black Sea Grain Initiative.
“Nonetheless, the impact of interest rate hikes since November 2021 may limit the upside as consumer demand wanes, particularly for discretionary goods and services.”
Delport added that they still believe the Reserve Bank will remain steadfast in its determination to see inflation return sustainably to the midpoint of the target despite the better-than-expected inflation numbers.
Absa senior economist Miyelani Maluleke said their near-term CPI inflation forecasts are slightly higher despite today’s downside surprise.
“This is mostly due to fuel prices. Even with a core inflation path that is now moderately lower, we expect headline inflation to rise temporarily in coming months to reach 5.5% in September before moderating to 5.3 in October and ending the year at 5%,” Maluleke said.
North-West University economics professor Raymond Parsons said the news on the inflation front is encouraging for consumer and business confidence.
“There is a sufficiently persistent trend of improvement in the inflation outlook to justify the Reserve Bank again leaving interest rates unchanged at its meeting next month.”
**This article has been updated throughout with new information and comment.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.