The slight retreat in the June inflation print, with a slowdown in the annual inflation rate for food and rental prices, could start creating room for the Reserve Bank to consider easing monetary policy in the run-up to its next repo rate decision in September.
Consumer inflation slowed to its lowest level of 2024 in June, Stats SA data showed on Wednesday. As measured by the consumer price index (CPI), prices rose at 5.1% in June, down from 5.2% in both May and April.
That was broadly in line with economists’ expectations and forecasts for inflation to ease slightly in June, though the rate is expected to remain close to 5% until later this year.
According to Stats SA, the main contributors to the 5.1% annual inflation rate were housing and utilities, which increased 5.5%, and goods and services, which were up 7% year on year.
Food and transport increased 4.6% and 5.5%, respectively, though the rate of price increases has slowed since May.
In its most recent interest rate decision, the Bank’s monetary policy committee (MPC) said last week that SA’s inflation outlook had improved. The Bank now expects inflation to return to the midpoint of its 3%-6% target band in the fourth quarter of 2024. It previously forecast price increases would dip below 4.5% by only the second quarter of 2025.
According to the Bank, headline consumer inflation for 2024 is projected at 4.9%, compared with the 5.1% forecast at the previous meeting and down from 6% in 2023.
The MPC kept the repo rate steady at 8.25% but signalled that an easing of inflation in June, July and August would have a marked influence on its next interest rate decision in September.
Dovish case
Two of the inflation-related risks highlighted by Bank governor Lesetja Kganyago last week — food costs and rentals — eased in June, which could “marginally strengthen the dovish case for MPC before the September meeting”, Absa economists said in a note on Wednesday.
The June CPI data included the quarterly survey of housing costs, which have 16.5% weighting in the CPI basket. On a month-on-month basis rental inflation jumped 0.8%, but on an annual basis it slowed to 2.8% from 2.2% in May.
“After stalling at 4.7% in April and May, the annual rate for food and nonalcoholic beverages (NAB) edged lower to 4.6% in June,” said Stats SA. Inflation for this category declined from its recent peak of 14% in March 2023 to its lowest reading in 45 months in June.
There was a moderation in inflation across most products in the food baskets, except for bread and cereal products, as well as meat. The Agricultural Business Chamber (Agbiz) said the slight uptick in those particular product prices was unsurprising.
“The challenge arises from the midsummer drought that led to an 18% year-on-year decline in maize production to an expected 13.4-million tonnes. Given the scale of the decline in the white maize harvest and the expected strong demand from Southern Africa, we expect white maize prices to remain reasonably elevated for some time and thus sustain the increases in the prices of bread and cereal products in the food basket,” Agbiz said.
It added, however, that it didn’t expect potential price increases to be substantial, given upbeat global forecasts for grain production in the 2024/25 season. Meat price increases were expected to “remain mild”.
Absa said the degree to which the recent rise in crop prices would show up in the food basket was a source of uncertainty. “Encouragingly, price pressures across the rest of the food basket remained contained. Our baseline view is for food and NAB inflation to average 4.6% in the second half of 2024.”
Kevin Lings, chief economist at Stanlib, said that while there remained some upside risks to SA inflation, the moderation in food inflation and the recent “outperformance of the rand”, among other factors, suggested the Bank could consider cutting rates twice in the second half of 2024.
Update: July 24 2024
This story includes comment from Absa and Stanlib.
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