The release of the June inflation figures on Wednesday will be the first of three such releases expected before the Reserve Bank’s monetary policy committee (MPC) announces its next interest rate decision on September 19.
Forecasts broadly favour a gradual slowdown in the headline inflation rate over the coming months, starting with a slight downtick to 5.1% in June (which would be the lowest headline inflation print this year) after remaining unchanged at 5.2% year on year in May.
If inflation eases, as widely expected, over this period it will have a marked influence on the interest rate decision by the central bank in September.
Markets have already started factoring in a higher likelihood that the central bank will commence its interest rate cutting cycle in September, said Investec economist Annabel Bishop.
“SA’s forward rate agreement curve is now factoring in almost an 80% chance of a 25 basis point interest rate cut at the September MPC meeting, and just above a 40% chance of another at the November MPC meeting”, said Bishop.
Last week when the Bank announced its decision to hold the repo rate steady at 8.25% it presented an improved headline inflation forecast. It revised its expected consumer price index (CPI) inflation average for the year down from 5.1% to 4.9% and said inflation could dip to the midpoint of the 3%-6% target band by the end of the year.
However, governor Lesetja Kganyago said that apart from the risk posed by global interest rates remaining “higher for longer”, the Bank was concerned about the trajectory of inflation expectations, prompting the MPC to assess the risks to the inflation outlook to be to the upside.
The Bank remained concerned about sticky services inflation as well as administered prices such as electricity.
Eskom implemented a roughly 13% electricity price increase in April for customers who buy power directly from the utility. This was followed by price increases by municipalities in July which are yet to be reflected in inflation data.
Year-on-year inflation in administered prices has trended upwards from 6.9% in January to 8.9% in May.
Kganyago said the MPC had previously identified that higher food prices could pose a risk to inflation down the line despite recent disinflation in the category.
“It seems to be very much a rand story, because if you look at the dollar price, the price of foods such as cereals is up, and when you see the rand price it has come down,” he said.
According to a food inflation note published by the Bureau for Food and Agriculture Policy (BFAP), May’s year-on-year inflation rates saw some deflation for maize meal, white bread, pasta, certain cuts of beef, whole fresh chicken, and sunflower and canola oil. There were, however, steep increases for tea and instant coffee, frozen chicken portions, eggs, rice, potatoes and sugar.
BFAP did note some upside risk to cereal prices, saying that after a period of sustained decline global cereal prices rose in May, driven by unfavourable crop conditions in major producing areas in the northern hemisphere.
Nevertheless, cereal prices remained well below levels from a year ago and in its latest food price index release the Food and Agriculture Organisation of the UN said global export prices of all major cereals decreased month on month in June due, in part, to a “larger than previously expected planted area to maize in the US, along with generally good crop conditions”.
In the local maize market domestic prices decreased month on month in May as a result of the stronger exchange rate. However, given a projected 19% drop in production, BFAP expects to see inflation on maize meal rise in the coming months.
In its latest inflation update, the Bureau for Economic Research (BER) said that while there were still lingering upside risks stemming from weather shocks and broader logistics constraints, food inflation appears to be more stable compared with previous years.
“Price increases in food and nonalcoholic beverages have moderated ... falling to its lowest level since September 2020 (4.7%) in April and May. We see this average around 4.9% in 2024 before slowing ever so slightly in 2025,” the BER said.
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