The cost of living in South Africa could accelerate further to steeper levels as fuel prices are expected to increase again in July, lifting upward pressure on food inflation and basic services.
This comes as consumer inflation in South Africa surged to a five-year high in May, breaking through the upper limit of the South African Reserve Bank’s monetary policy target range of 3 to 6 percent.
Statistics South Africa (Stats SA) said yesterday that the Consumer Price Index (CPI) quickened to 6.5 percent in May from 5.9 percent in April and March, rising above market expectations of 6.2 percent.
This was the highest reading since January 2017 when the rate was 6.6 percent as prices continued to accelerate mostly for transport on account of rising global oil prices, food and non-alcoholic beverages.
Economists have warned that consumer prices are likely to rise to still higher levels in the months to come.
FNB economist Koketso Mano said yesterday that headline inflation should rise strongly in the coming months and looked set to breach 7 percent in June.
Mano said petrol prices continued rising by more than R2 per litre in June despite the fuel levy relief extension, with the new housing data adding to more immediate second-round effects.
“Beyond June, the weaker rand has driven the month-to-date under-recovery in the petrol price to nearly R2 per litre, and this would add to the lapse of half of the R1.50 general fuel levy relief in July,” Mano said.
“Oil prices should be supported by persistently strong demand amid potential European Union sanctions on Russian oil.”
Investec chief economist Annabel Bishop concurred that inflation in June was expected to rise above 7 percent on the R2.33 per litre hike in the petrol price, base effects, food price pressures and potentially some second-round effects.
“We expect CPI inflation to average 6.5 percent for this year, as the Russian/Ukraine war continues for longer than expected and the effects of the war, and deglobalisation, intensify on price pressures, causing inflation expectations to rise globally and domestically,” Bishop said.
Data from Stats SA showed that transport and food and non-alcoholic beverages accounted for just over half of the annual rate, with sharp price increases recorded in both categories.
Stats SA chief director for price statistics Patrick Kelly said fuel, in particular, continued to be a major contributor as the headline rate falls to 5.1 percent from 6.5 percent if the impact of fuel is removed from the CPI reading in May.
“Diesel prices jumped by 8.1 percent between April and May, taking the annual rate to over 45 percent. The average price of a litre of diesel in May 2021 was R16.20, meaning it cost R729 to fill a 45-litre tank,” Kelly said.
“Prices for food and non-alcoholic beverages jumped by 2.1 percent between April and May, representing the largest monthly increase since February 2016 when the monthly rise was also 2.1 percent. At that time the country was experiencing a severe drought.”
Last month, the South African Reserve Bank (SARB) revised higher its inflation forecast for 2022 to 5.9 percent from 5.8 percent due to higher food and fuel prices.
However, the upward adjustments to annual inflation projections will also place further upward pressure on the SARB to hike local interest rates further following a 50 basis points hike to 4.75 percent.
However, Anchor Capital investment analyst Casey Delport said the SARB had to be cognisant of the detrimental impact of a hiking cycle that was too severe on an already strained economy.
Delport said poor consumer spending would dampen economic growth in turn, along with many other idiosyncratic factors.
“However, based on this latest print and its respective drivers alone, we believe that the SARB will likely hike rates by 50 basis points in July, followed by two more rate hikes in increments of 25 basis points in the September and November meetings,” Delport said.
“This would take the repo rate to 5.75 percent by year-end.”