Sanisha Packirisamy, Economist at Momentum Investments

Statistics South Africa (Stats SA) reported headline inflation (CPI) at 5.9% year-on-year (y/y) for October 2023, a surprisingly large jump from the 5.4% figure reported for September 2023.

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“Today’s headline measure of inflation exceeded the Reuters’ median expectation of 5.6%”, says Sanisha Packirisamy, economist at Momentum Investments. “Today’s jump in inflation came as a surprise to markets despite investors having already taken account of the sharp rise in fuel prices in October and the effects of the Avian flu on egg and chicken meat prices.” Other areas of the basket, including hotel costs, new and used vehicle prices and personal care costs increased by more than anticipated.

Packirisamy notes that “the fuel price played a significant role in the increase in the headline figure published today given the R1.14/litre rise in the petrol price in October, which added substantially to the inflation outcome”. Petrol inflation rose from 1.7% y/y in September to 11.2% y/y in October. Nevertheless, this trend is likely to reverse in the next two inflation readings given the drop in fuel prices. According to the Central Energy Fund, fuel prices were slashed by R1.78c/l in November and the current over-recovery for December hints at another large cut of around R1.07c/l. “Geopolitical risk factors, including the ongoing war in Ukraine and the Israel-Palestine conflict, nonetheless continue to pose a significant upside threat to the international price of oil”, says Packirisamy.

“The Avian flu has driven up inflation in the milk, cheese and eggs category due to the shortage of eggs”, Packirisamy added. Inflation in this category rose from 11.2% in September to 12.4% in October. Consequently, food inflation, which had been on a deceleration trend since the peak of 14.3% in March earlier this year, reversed course to 8.8% October. Additionally, the price of potatoes made a significant contribution to vegetable prices in the month, possibly on the back of adverse weather conditions.

Despite the blip higher in headline inflation, underlying measures of inflation tracked lower. Services inflation fell from 4% in September to 3.8% in October. Slight above the Reuters’ consensus expectation, core inflation dropped from 4.5% in September to 4.4% in October. Underlying measures of demand in the economy remain relatively muted, suggestive of fewer signs of broader-based inflationary pressures outside of the categories of food, fuel and administered costs that are driving inflation at a headline level.

“Today’s figures leave our annual expected average on headline inflation at 5.9%% for this year and 4.9% for next year”, highlights Packirisamy.

Today’s inflation figure should not trigger concerns for the SA Reserve Bank’s (SARB) Monetary Policy Committee (MPC) given that the jump higher is seen as temporary and should reverse on lower fuel inflation in the next few readings. “We do not expect the SARB to hike interest rates at the upcoming MPC meeting on Thursday given a lack of demand-pull inflation pressures, few signs of a wage-price spiral, a pause by many global central banks as they assess the impact of previous monetary policy tightening, no jump in the risk premium following the release of the medium-term budget and a 1.7% strengthening in the rand since the previous MPC meeting,” Packirisamy noted.

Nevertheless, the SARB is expected to maintain a hawkish rhetoric to keep inflation expectations at bay. The SARB has on numerous occasions spelt out the dangers of higher inflation and the disproportionate hit to lower income earners that arises in a high inflation environment. Taking the past six months into account, headline rates of inflation have been more than 3% higher for the bottom 30% of spenders in SA relative to the top 30% of spenders.

“A restrictive monetary policy environment will likely persist well into 2025 in the SA environment. This is in line with the global narrative of keeping interest rates sufficiently high for sufficiently long to ensure that inflation and inflation expectations remain well anchored despite continued geopolitical risk factors which continue to threaten global supply chains and the price of food and energy. Central banks, globally, remain cautious to prematurely declare a victory on inflation and as such are likely to avoid early easing in light of continued upside risks to inflation,” Packirisamy concluded.

ENDS