Sanisha Packirisamy, Economist at Momentum Investments

A minor 0.1% deviation from anticipated inflation figures saw a subdued reaction from financial markets to Statistics South Africa’s (SA) latest consumer price inflation report for March. The headline inflation figure eased to 5.3% year on year (y/y) in February 2024, relative to the Reuters consensus of 5.4% and down from February’s 5.6%. This left the month-on-month increase at 0.8% for March.

Sanisha Packirisamy, an economist at Momentum Investments, remarked, “Today’s deceleration in headline inflation relative to a year ago is mainly attributable to a sustained drop in food inflation and a contained increase in rental inflation.” She elaborated, “Food inflation dropped back within target for the first time since December 2021. Food inflation slowed to 4.9% relative to a year ago and fell by 0.1% compared to February, on the back of lower meat prices in the month. When compared to a year ago, meat prices were up by 0.8% but this was the lowest year-on-year escalation since August 2019. A tentative bottoming out in inflation at a producer level, however, points to higher meat prices ahead at a consumer level. Nonetheless, a 2.4% drop in agricultural crop prices at the producer pipeline level is a positive sign for a further reprieve in bread and cereal inflation at a consumer level in the coming months.”

Packirisamy cautioned, “Fuel inflation crept higher for a third consecutive month to 6.5% year on year, given the hefty 121 cents per litre increase for March. April saw a 67 cents per litre increase, while the current under-recovery for May points to a further 33 cents per litre hike. Although the escalation in conflict in the Middle East risks a sharper rise in oil prices, markets have taken a rather sanguine approach and do not appear to be pricing in an all-out war.”

An additional 43% of the basket (which includes rental inflation) is surveyed in March in addition to the regular monthly surveys, which raises forecast error for this month’s print. Regarding rental inflation, Packirisamy highlighted that “A still depressed housing market has led to rental inflation remaining contained, with only a 0.8% increase registered for March relative to a month ago. Rental inflation relative to a year ago, remains close to the bottom end of the inflation target range at 3.3%. Rental inflation has tracked below the midpoint of the inflation target for 70 months in a row.”

“The inflation gap between high and low-income earners narrowed to its smallest gap in 20 months at 0.6% in March. The bottom 30% of spenders in the economy faced their lowest headline inflation rate (of 5.8%) since December 2021, alongside a further drop in food inflation and lower public transport inflation, which has averaged 3.7% over the past 12-month period,” noted Packirisamy.

Packirisamy acknowledged the South African Reserve Bank’s (SARB) concerns over the larger contribution of services inflation to overall inflation, which has recently mimicked the trends observed globally. In the International Monetary Fund’s latest World Economic Outlook update for April, it noted that the progress on disinflation had been interrupted by sticky services inflation as well as a rise in geopolitical tensions, which have led to trade restrictions and higher prices on food and fuel. After jumping nearly a full percentage point in February, services inflation only ticked marginally higher to 5% in March. The continued rise in services inflation, in spite of contained rental inflation, could nonetheless add to a cautious view on upside inflation risks by the SARB.

A sustained retreat in headline inflation is nevertheless expected in the coming quarters, averaging a projected 5.4% for the year and lowering to an assumed 4.5% for next year. That said, upside risks remain from exchange rate fluctuations, administered prices and global food and oil price pressures stemming from heightened geopolitical pressures.

Anticipating the SARB to maintain interest rates at 8.25% in May and only cutting in the third quarter, we acknowledge increased risks to an even more delayed interest rate-cutting cycle due to global and local developments affecting inflation expectations and recent global central bank rhetoric, warning against the risks of a potential policy error associated with premature easing. “While we continue to pencil in four interest rate cuts, in the cycle, of 25 basis points each between this year and next, there are still notable risks to a later and even shallower interest rate cutting cycle,” said Packirisamy.

ENDS