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Consumer inflation cools to lowest in two years in July on fuel, food prices

Photographer: Ayanda Ndamane/ (ANA)

Photographer: Ayanda Ndamane/ (ANA)

Published Aug 24, 2023


Consumer prices in South Africa continued to cool on lower fuel and food prices, retreating to a two-year low of 4.7% in July from 5.4% in June and came in lower than expected.

However, the drop might be temporary, analysts yesterday warned.

Headline inflation was well below the upper limit of the South African Reserve Bank’s (SARB) monetary policy target range of between 3% to 6% and came in below the Bloomberg market consensus of 4.9% year on year.

Statistics South Africa (Stats SA) yesterday said the consumer price inflation (CPI) increased, on average, by 0.9% between June 2023 and July 2023 - up from the monthly rise of 0.2% recorded in both May and June.

Stats SA chief director for price statistics Patrick Kelly said transport tapped the brakes on overall inflation on lower fuel prices.

He said the decline in fuel prices weakened the upward push of transport on consumer inflation. The annual rate for fuel was negative at -16.8% in July 2023. This dragged the transport category down into negative territory for the first time since January 2021.

He said food inflation had also eased. The annual rate for the food & non-alcoholic beverages (NAB) category was 9.9% in July, lower than June’s print of 11%. Annual inflation for bread and cereals slowed to 13.1% from 15.5% in June. Maize meal, an important staple, was cheaper in July compared with June, with prices falling on average by 0.7%.

However, the sugar, sweets and desserts category recorded an annual inflation rate of 18.7%, up from 16.4% in June - the highest reading for this category since May 2017.

Kelley said Stats SA surveyed municipal tariffs every year in July and August. The housing and utilities index increased by 2.8% between June and July. On average, households were paying 14.5% more for electricity. Water tariffs increased by 9.6% and property rates by 2.9%.

A final picture would emerge in the August consumer price index release with the completion of the survey, he said.

Annabel Bishop, the chief economist at Investec, cautioned the CPI drop towards the midpoint of SARB’s inflation target range was likely temporary.

‘’The CPI inflation rate is likely to lift somewhat in August on base effects as July 2022 proved to be the peak for the inflation trajectory currently in SA,’’ she said.

The upwards pressure would continue from August over the fourth quarter of 2023, causing CPI inflation to return to around 5% year on year, although the Monetary Policy Committee (MPC) should look through the temporary rise and not necessarily see it as a cause on its own to tighten monetary policy, Bishop said.

“We expect CPI inflation will average 5.8% y/y this year, although the rand and fuel prices pose risks,” she said.

Casey Delport, an investment analyst at Anchor Capital, said despite the low reading and looking ahead, as base effects faded out, the inflation outlook would be vulnerable to new shocks.

This included concerns around the El Niño Southern Oscillation, which typically means below average rainfall for South Africa, as well as renewed uncertainties surrounding the Russian Federation’s decision to end implementation of the Black Sea Grain Initiative.

“Nonetheless, the impact of interest rate hikes since November 2021 may limit the upside as consumer demand wanes, particularly for discretionary goods and services,” Delport said.

She said, “Despite this better-than-expected print, we believe that the SARB will remain steadfast in its determination to see inflation return sustainably to the midpoint of the target. The committee has notably not yet formally declared a peak as food inflation remains high and at risk of keeping inflation expectations elevated- in turn risking broader inflationary pressure.

“Any further shocks that threaten to push, delay or even derail the return of inflation to the midpoint could lead to further hikes. As such, we still believe that there is a chance for a further 25bps (basis points) hike at either the September or November MPC meeting,” Delport said.

Professor Raymond Parsons,  a professor at the NWU School of Business and Governance, said, "The better news on the inflation front is encouraging for consumer and business confidence. There is a sufficiently persistent trend of improvement in the inflation outlook to justify the Monetary Policy Committee again leaving interest rates unchanged at its meeting next month."

The rand yesterday gained ground after the CPI data was released, gaining 0.04% to R18.73 against the dollar.