Herman van Papendorp, Head of Investment Research & Asset Allocation, Tshiamo Masike, Economic Analyst at Momentum Investments and Sanisha Packirisamy, Economist at Momentum Investments

Momentum Investments have released their report based on ‘Consumer pulse: Food inflation underpins negative inflation surprise yet again’ prepared by the Momentum Macro Research Team. In this article is a summary of highlights from the team, as well as a downloadable PDF of the research paper.

Highlights:

• Headline inflation rose to 7.1% year-on-year (y/y) in March 2023, against the market’s expectation for an improvement to 6.9% y/y. The rise in food inflation as well as education costs drove the deviation.
• Core inflation was unchanged at 5.2% y/y in March, but this outcome exceeded the median Reuters expectation of 5.1% y/y.
• Rental inflation (16.49% of the basket) was subdued at c.2.5%, which reduces demand-pull inflationary pressures.
• Data from PayProp and the newly released residential property price index (RPPI) by Statistics South Africa (Stats SA),suggests an uptick in rental and property prices in 2022. However, affordability concerns and weak economic growth, prospects will likely restrict the rise of both indicators this year.
• Water and electricity inflation presents upward pressure on administered prices in the coming months. Most SA municipalities have tabled proposed municipal rate increases for 2023/24 in their respective draft budgets with the following un-weighted average increases: property rates (3.75%), water (10.11%), sewerage (7.78%), electricity(18.38%) and refuse removal (6.18%).
• Despite these proposed increases, municipal finances are in bad shape and basic service delivery has deteriorated. This has resulted in increased protest activity.
• Elevated food inflation is impeding a meaningful improvement in headline inflation. However, inflation in meat, as well as bread and cereals inflation has started decelerating and could drop more notably in the second half of the year.
• Producer price inflation (PPI) for live animals dropped substantially to 15.4% y/y in February. A weak rand is nevertheless, keeping the price of bread and cereals high.
• The SA Reserve Bank (SARB) revised its estimate of average food inflation in 2023 to 9.9% (up from 7.3%). The Agriculture Business Chamber of SA (Agbiz) sees food inflation averaging lower (between 7% and 8%) on the back of sufficient agricultural supply and limited impact of weather condition changes.
• Notable upside surprises in headline inflation in the latest two readings, alongside measures of underlying inflation trending in the upper half of the inflation target, suggest an increased risk of additional monetary policy action at the May interest rate-setting meeting. Nonetheless, we maintain that on a forward-looking basis, real interest rates have moved into more restrictive territory, potentially capping prospects for significant tightening from here.

Download the full report: Consumer pulse: Food inflation underpins negative inflation surprise yet again

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