Consumers face tough few months ahead as inflation continues to rise

Several analysts have already pencilled in a further rise of 25 basis points in interest rates at the SARB’s next Monetary Policy Committee (MPC) in May on their expected lower rate of inflation. Photo: Ayanda Ndamane/ African News Agency(ANA)

Several analysts have already pencilled in a further rise of 25 basis points in interest rates at the SARB’s next Monetary Policy Committee (MPC) in May on their expected lower rate of inflation. Photo: Ayanda Ndamane/ African News Agency(ANA)

Published Apr 20, 2023

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Consumers in South Africa could be in for a tough few months ahead as the SA Reserve Bank (SARB) looks set to ramp up its interest-rates hiking cycle in a bid to curb the stubbornly high inflation as food prices rose the highest in 14 years.

Data from Statistics South Africa (Stats SA) yesterday showed that the headline consumer price inflation (CPI) rose for the second month in a row in March, which could force the SARB’s hand for another interest rate hike in May.

Stats SA yesterday said inflation edged higher to 7.1% year-on-year in March, from 7.0% in February and 6.9% in January.

This was against market expectations of a 6.9% drop, meaning that inflation was still above the upper limit of the SARB’s target range of 3%-6%.

Core inflation was flat at 5.2% year-on-year, and had monthly pressure of 0.8%.

Stats SA said food inflation, together with transport and education fees, were the main drivers of the increasing headline CPI.

Patrick Kelly, chief director for price statistics at Stats SA, said food and non-alcoholic beverages prices continued to accelerate by 14.0% in the 12 months to March, from 13.6% in February, the largest annual increase since March 2009.

Kelly said this represented the largest annual increase since the 14.7% rise in March 2009.

“Milk, eggs and cheese; sugar, sweets and desserts; fruit and vegetables experienced upward inflationary pressure in March,” Kelly said.

“(However) bread and cereals, meat, oils and fats, and fish bucked the trend, recording slower growth.”

On a monthly basis, consumer prices inched up by 1% in March, the most in eight months and above market forecasts of a 0.9% increase.

Trade union UASA said consumer prices increases will have workers bent over backwards to make ends meet amid the rising cost of borrowing, high fuel prices, and electricity price hikes.

“From July, City of Tshwane residents are expected to fork out 18% more for electricity and 9.2% more for water, along with other metros,” said UASA spokesperson Abigail Moyo.

“Workers are, again, expected to pay more for services that are not delivered amid power outages and water scarcity.”

South Africa’s inflation rate is trending in the opposite direction compared to other economies.

Inflation in the Euro Area was at 6.9% in March, down for a fifth consecutive month from last October's record high of 10.6% and its lowest level since February 2022.

In the US, inflation cooled to the lowest point in almost two years in March as year-over-year price increases reached 5%, while in the UK inflation eased to 10.1%, down from 10.4% in February.

The International Monetary Fund last week predicted that global consumer inflation would fall from 8.7% in 2022 to 7.0% in 2023, and 4.9% in 2024, before moving closer to the pre-pandemic average of around 3.5% in 2025, in line with weaker global economic activity and easing supply chain pressures.

This is why some local economists remain optimistic that the domestic inflation rate will follow suit and soften somewhat in the second half of the year.

FNB senior economist Koketso Mano said while global food prices had continued to fall, local food inflation appeared to be exacerbated by idiosyncratic factors – mostly related to energy supply constraints.

Mano, however, said yesterday’s data pointed to headline inflation slowing to 7.0% in April, with fuel inflation softening though oil prices may remain fluid due to production cuts and China’s recovery.

“However, the stickiness reflects the impact of frictions related to escalated geopolitical tensions and strides to decarbonise economies,” Mano said.

“Unfortunately, this should spill over to South Africa, and will likely be exacerbated by a weaker exchange rate, energy, and logistical issues, as well as adverse weather patterns.”

Last month, the SARB raised its benchmark lending rate by a surprising 50 basis points in a split decision to 7.75% per annum as inflation remained sticky.

The SARB has now raised borrowing costs by a cumulative 425 basis points since the interest rate-raising cycle commenced in November 2021, raising the repo rate to its highest since 2010.

Several analysts have already pencilled in a further rise of 25 basis points in interest rates at the SARB’s next Monetary Policy Committee (MPC) in May on their expected lower rate of inflation.

“With inflation likely to recede only slowly, the MPC is expected to remain hawkish, raising interest rates one more time by 25 basis points in May, taking the repo rate and prime lending rate to peaks of 8% and 11.50%, respectively,” said Nedbank economist Johannes Khosa.

However, North West University Business School economist Prof Raymond Parsons warned that higher borrowing costs were not the only factor influencing the economic and business outlook as there were whirlpools on both sides, not on one only.

“The red lights are also now flashing even more strongly for SA’s growth outlook,” Parsons said.

“The latest intensified Eskom load shedding regime has raised the risk that the economy may now have moved into a technical recession.”

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