Food prices are forecast to remain sticky and influence consumer prices slightly upwards in the next few months on the back of below-average rainfall, in spite of inflation cooling off in November after a three-month upswing.
Statistics South Africa (StatsSA) yesterday said that the annual consumer inflation eased to 5.5% in November, down from a five-month high of 5.9% in October.
The November inflation print was just below market forecasts of 5.6%, mainly driven by a significant decrease in fuel prices seen in the large petrol price cut of R1.78 per litre implemented in November.
StatsSA said the fuel price index fell by 5.5%, which drove the annual rate for fuel lower to 1.8% in November from 11.2% in October.
StatsSA chief director for price statistics Patrick Kelly, however, said consumer prices for food and non-alcoholic beverages accelerated to the highest level in four months to 9% in November from 8.7% in October.
Kelly said meat inflation crept up to 3.5% from 3.4% in October, though inflation for bread and cereals declined for a seventh consecutive month.
“The outbreak of avian flu continued to disrupt the poultry market. The annual rate for IQF (individual quick frozen) chicken was 7.3% in November, up from 5.5% in October,” Kelly said.
“Non-IQF frozen chicken recorded an annual rate of 9.1% in November. Egg prices continued to boil, heating by a monthly 10.6%. This pushed the annual rate for eggs higher to 39.9% from 24.4% in October.”
Economists are now expecting inflation to ease further in December, ending the year at around 5.3%, reflecting stable global oil prices and a firmer rand, which will translate into lower petrol prices.
Nedbank economist Johannes Khosa said food prices would also start to ease as the impact of the temporary supply shocks in the poultry industry fade.
“We forecast inflation to hover between 5% and 5.5% in the first half of next year before falling more convincingly towards the midpoint of SARB's target range during the third quarter and averaging 5% in 2024,” Khosa said.
“However, the risks to our forecasts reside marginally to the upside due to the uncertainties surrounding the outlook for oil prices, food prices and the rand.”
StatsSA said that core inflation, which strips out the more volatile price categories of food and energy costs, increased slightly to 4.5%, from 4.4% in October.
On a monthly basis, consumer prices edged down by a mere 0.1% in November, marking the first decrease in 10 months and compared with market estimates of a 0.1% rise.
Anchor Capital investment analyst Casey Delport also concurred that inflation would continue to moderate gradually.
However, Delport said the outlook faced significant upside risks, particularly regarding food prices.
“The emergence of the El Niño-Southern Oscillation (ENSO), which typically implies below-average rainfall for SA, poses a risk of higher food prices. At the same time, renewed geopolitical tensions in the Middle East raise the risk of oil prices staying elevated for longer,” Delport said.
“Furthermore, the rand will face headwinds from the expected deterioration in the government’s fiscal position and growing uncertainty as the country enters a precarious political environment ahead of next year’s national election.”
Nonetheless, the cumulative 475 basis points increase in interest rates since November 2021 is believed to have started to dampen demand, as evidenced by slowing household consumption of interest rate-sensitive goods.
Economists believed the sluggish domestic demand will offset these risks and convince the SA Reserve Bank (SARB) to start easing interest rates from May onwards, with four reductions totalling 100 basis points, taking the repo rate to 7.25% at the end of 2024.
North West University Business School economist Professor Raymond Parsons said this inflation print was welcome news for the economy as a whole as it enters 2024.
Parsons said this brought headline inflation further within the SARB’s inflation target range of 3%-6%, and offered the prospect that South Africa has now entered a cycle of lower rates of inflation.
“If this trend continues, it not only means that rates of inflation in SA are receding, but that interest rates may now have peaked. The SARB has kept interest rates unchanged since May,” Parsons said.
“However, since the SARB will want more evidence that the battle against inflation has indeed been won, interest rates are unlikely to be reduced until well into 2024.”