EDITORIAL: Some comfort for the MPC in falling inflation expectations

Inflation expectations are one of the data points the Reserve Bank’s monetary policy committee pays close attention to when it makes interest rate decisions, as it will again when it meets next week (September 19-21).  

Inflation expectations matter because they shape the behaviour of the price and wage setters, which helps to drive inflation. Shocks like oil or food price spikes or exchange rate depreciations may lift consumer prices on a one-off basis. But if businesses start upping their prices or trade unions increase their pay demands on the expectation that the price rises will continue, it generates second-round effects that keep inflation high, and can lead to a price spiral if they remain unchecked. That’s why monetary policymakers watch the expectations data closely to see whether inflation is under control, or not, and whether they need to take firmer action on interest rates or loosen up. 

After a steep hiking cycle, there’s a big debate globally and at home about interest rates now being high enough to start getting inflation back to target. In that context, SA’s latest inflation expectations survey data from the Bureau for Economic Research are particularly welcome — even if they still raise concerns. 

They show that average inflation expectations declined significantly in the third quarter after seeming to peak in the second quarter. This was the first drop in two years in average expectations for 2023. But expectations were also down for the period to 2025 — which is the period that monetary policy seeks to influence. Significantly too, it was business people and trade unionists whose expectations declined, so that could have a direct bearing on prices and wages. Analysts, by contrast, are clearly still sceptical — their expectations have hardly moved. 

Inflation expectations are generally backward-looking in SA. Consumer price inflation is now well off last year’s peak of more than 8% and in July declined to a lower-than-expected 4.7%,  though it’s seen to pick up again on the latest fuel price hikes. Expectations are still ahead of this after their steep rise of the past year, but they have on average come down to below the target range for next year and 2025 and are now just over the top of the range for 2023. That reflects the views of the business people, trade unionists and analysts surveyed by the BER: households are more worried about inflation, which they see running at 7% over the next 12 months. 

The Reserve Bank will surely still be worried too. But the lower inflation rate and lower expectations should help to relieve some of the pressure on it to implement another rate hike next week. It will surely also want to factor in how the 475 basis points of hikes it has already implemented are playing out in the economy. Results from banks and retailers certainly indicate consumers are taking pain. 

But the rand is taking pain too in volatile and uncertain global markets. Our central bank is hostage to global swings and roundabouts so even if the state of the local economy and local expectations might signal the committee’s hiking job is done, we can expect it to wait and see.