Consumer price inflation came in unexpectedly close to the midpoint of the inflation target range in July. It is welcome news, testament to the firm action the Reserve Bank has taken since it started hiking interest rates in November 2021, and it is likely to take the pressure off for further hikes, at least for now.
But SA is not yet out of the inflation woods. The external and domestic environments remain risky. And there is much that actors other than the Bank can and should do to help mitigate those risks.
Latest data from Stats SA show inflation declined to 4.7% in July from 5.4% in June. This is well below last year’s peak and better than market expectations of 4.9%. The petrol and diesel price cuts of the past couple of months were a big reason, with fuel prices down almost 17% year on year in July.
The faster-than-expected slowdown in food price inflation helped too: even though food price inflation was still a steep 10% in July, hitting the poor and pensioners particularly hard, this is well below recent peaks. Fuel price deflation and food price disinflation helped to offset the steep 14% jump in electricity prices for the month.
Nor was the positive inflation surprise just about volatile food and fuel prices: the core inflation rate came in below expectations too, also at 4.7%. That suggests the underlying inflationary pressures within the economy are not too enormous. It is not too surprising in such a weak economy, but it should hearten the Bank somewhat.
Disappointingly, the good news is not expected to last into next month. September’s expected steep diesel and petrol price hikes are likely to drive up inflation again, and increases in the diesel price tend to put upward pressure on food prices. Electricity price hikes could also filter through to other prices. The Bank will be watching those closely, and monitoring too for wage pressures and any signs of persistently high inflation expectations.
It will be worrying just as much about global markets, and particularly so after the annual Jackson Hole meeting of central bankers and leading economists in the US last week. In US Federal Reserve chair Jay Powell’s keynote address he made it clear that the Fed was still worried about inflation and could yet hike rates again. Even if there are no more hikes, Powell signalled that rates will definitely stay higher for longer. Likewise European Central Bank chief Christine Lagarde warned that eurozone inflation is still a concern and further hikes are likely.
The impact of the Jackson Hole comments could well be negative for emerging markets, including SA, with investors taking advantage of still high advanced economy interest rates at the expense of emerging market assets. The “risk off” sentiment in global markets is likely to persist, as is the volatility.
The rand has recovered from its recent worst levels but is still down 8.5% year to date, and is vulnerable to further global gyrations. That is especially so given SA’s rapidly deteriorating fiscal position, which is driving up the so-called “country risk premium” and putting pressure on interest rates all round.
So while the Reserve Bank may well hold rates at its September meeting, and may even be able to implement no further rate hikes if all goes well, nobody is expecting rate cuts before next year. That is unhappy news for indebted consumers and businesses, who are also feeling the pain of load-shedding and the direct costs of high food, fuel and other administered prices such as rates and electricity.
Banks and other lenders need to be careful not to grant credit aggressively to households or businesses that cannot afford the repayments. The government needs to step up too. Administered price inflation — excluding fuel and paraffin — is still running at 7.5%, which is well above the target range. And it is within the power of local and national government to waste less money, be more efficient and lower the cost of doing business generally.
Tackling the energy crisis much more assertively would directly help lower inflation, because load-shedding itself adds to the inflation rate. Transnet’s inefficiencies cannot help either, raising costs across the economy as more and more goods have to be carried on trucks rather than trains, and the ports impose long waits in and out. Then there is the government’s own fiscal position and its impact on country risk and ultimately on interest rates.
The bottom line is that it is not just the Bank’s job to combat inflation: the government also needs to provide some support.
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