Consumer inflation spiked in September, hurt by sharply higher fuel and elevated food prices.
Stats SA data released on Wednesday shows consumer inflation rose in September to 5.4% year on year from 4.8% in August and 4.7% previously.
But with core inflation falling to the Reserve Bank’s midpoint of 4.5%, the overall sentiment is that the inflation outlook remains well under control despite currency fluctuations and upward pressure on wages.
This is despite warnings by economists the odds are that the steady monetary policy can still be shifted at the November monetary policy committee (MPC) meeting by global inflation, and the Treasury’s response to the upcoming medium-term budget policy statement on November 1.
Stanlib chief economist Kevin Lings said while the lower core inflation reading should please the Bank, they are likely to worry about the persistence of high food inflation and the potential for second-round effects arising from the sharp increase in electricity inflation during July as well as the 14% increase in the petrol price over the past three months.
Stats SA data shows the fuel index increased for a second consecutive month, rising 7.6% between August and September.
The data shows that food inflation also ticked slightly higher. Patrick Kelly, Stats SA chief director for price statistics, said that after cooling for the past five months, the annual rate for food and nonalcoholic beverages inched higher to 8.1% from 8% in August.
Kelly said poultry-related products experienced some upward price movements in September as producers started to cull birds in response to the outbreak of avian flu.
Oil cuts
Momentum Investments economist Sanisha Packirisamy said this presents potential upward pressure on food prices, “but a temporary rebate on anti-dumping duties on chicken meat imports could alleviate shortages and price pressures”.
Packirisamy added that a potential escalation in the Israel-Gaza conflict could raise international oil prices even further after it initially increased due to oil supply cuts by major oil producers.
“As such, higher international oil prices and a weaker currency are ongoing concerns for local fuel prices and the trajectory for domestic inflation,” she said.
She said Momentum Investments expects the Bank to keep rates constant at 8.25% in the November interest rate-setting meeting given that the Bank anticipated the higher interim inflation rate.
“Third-quarter inflation remained in line with the Bank’s forecast and demand-pull inflation appears contained,” Packirisamy said.
“Nevertheless, the MPC is likely to maintain a hawkish tone given the risks to the inflation trajectory including the avian flu outbreak [and] higher medical insurance inflation in 2024.”
Shortly after the inflation announcement, the FTSE/JSE all share index fell 0.34%.
The rand strengthened 0.11% to R18.76/$, while the euro was up 0.09% to R19.86/€ and the pound was up 0.17% to R22.89/£ in morning trade.
Rate steady
SA’s two-year government bond yield was recorded at 9.50%, while the five-year and 10-year yields rose to 9.42% and 10.78%, respectively.
PSG Wealth CIO Adriaan Pask said the Stats SA reading supports the view that the Bank could keep the repo rate steady at the next monetary policy committee meeting in November.
“We remain watchful of the impact of fluctuations in inflation and interest rates on shares exposed to substantial discount-rate risk over this period and we will continue to adjust our products accordingly,” he said.
Absa said the softening in core CPI inflation should make the Bank’s monetary policy committee more comfortable with overlooking the near-term fuel-driven rise in headline CPI inflation, especially given its current assessment of the policy stance being restrictive.
Absa senior economist Miyelani Maluleke said they expect headline inflation to rise again in October before moderating from November.
Maluleke said given that fuel prices rose sharply again in October, they expect headline CPI inflation to rise slightly to 5.5%.
“Therefore, while we acknowledge the ongoing uncertainty, especially ahead of the [medium-term budget] on November 1, we see today’s data as supportive of our view of no further monetary policy tightening in the current cycle,” he said.
Standard Bank’s head of macroeconomic research, Elna Moolman, said that despite obvious inflationary risks, the odds might still be slightly tilted towards steady monetary policy at the MPC meeting.
Smaller widening
“This, however, depends to a large extent on global inflation and interest rate developments as well as the trajectory of the rand, including its response to the upcoming [medium-term budget], ahead of the next MPC meeting,” Moolman said.
She added: “While we concur with the general expectation for material fiscal slippage, we foresee a slightly smaller widening of the budget deficit than the consensus forecast.”
She said this could affect bonds and the rand slightly positively, but any sustained relief for financial markets will presumably be curbed by persistent concerns about longer-term fiscal sustainability.
Oxford economics senior economist Jee-A van der Linde said the surge in price inflation will make for a tense final MPC meeting of the year.
“Renewed rand weakness, renewed upside risk to oil prices, and a renewed hawkish tone by the US Fed suggest the picture has changed over the past month.
“However, with expectations of a stagnant economy in quarter three, the Bank should ask itself to what extent another rate hike would decrease demand-side pressures further.”
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