Sanisha Packirisamy, Economist at Momentum Investments 

Highlights:

• The inflation rate eased to 4.4% year-on-year (y/y) in August from 4.6% y/y in July according to Statistics South Africa (Stats SA). The moderation in headline inflation was largely underpinned by a sharp decrease in transport inflation (2.8% y/y in August from 4.2% y/y in July) and lower housing and utilities inflation (4.8% y/y from 5.3% y/y over the same period). This countered the upward price pressures stemming from food and non-alcoholic beverages (NAB) and alcoholic beverages and tobacco.

• Core inflation eased to 4.1% y/y in August from 4.3% y/y in July.

• Transport inflation has played a significant role in bringing the headline inflation rate lower thanks to the decrease in international oil prices and a stronger rand against the United States (US) dollar.

• The price of Brent crude oil decreased to an average of US$80.4/bbl in August, almost US$10 lower than in April (US$89.9/bbl). Oil prices decreased further to the lower US$70s/bbl in the first two weeks of September and temporarily dropped to just below US$70/bbl on 10 September 2024.

• Petrol prices decreased by R1.07/l over the past two months. The Central Energy Fund’s (CEF) estimated over-recovery (17 September) is pointing to an even larger petrol price (ULP 95) drop of R1.23/l in October, which means transport inflation will continue to place downward pressure on inflation in September and October.

• Food and NAB ticked up to 4.7% y/y in August (4.5% y/y in July) due to a broad-based increase in food prices.

• Total summer crops for 2024 are estimated to be 22% smaller than in 2023 according to the Crop Estimates Committee’s (CEC) latest forecast. Maize production, which makes up over 80% of summer crops, is expected to decrease by 20.5% y/y in 2024, reflecting the impact of El Niño. The estimated maize production remains sufficient to meet domestic demand but the maize crisis in Southern Africa could potentially lead to even higher maize prices.

• The Agricultural Business Chamber of SA (Agbiz) notes that the 2024-25 agricultural season will likely be in a recovery period with the possibility of La Niña (wetter conditions in SA) building momentum. La Niña would benefit crops, horticulture and livestock.

• The third consecutive deceleration in inflation in August and the broad-based decrease in inflation expectations in the third quarter reaffirm our view of a 25-basis point interest rate cut in September 2024.

• However, there are still upside risks to inflation (higher maize prices, elevated electricity prices and the two-pot retirement reform impact on consumer spending) and the oil market remains subject to uncertainty. As such, we expect the SA Reserve Bank (SARB) to proceed with caution by implementing smaller cuts of 25-basis points each. In total, we expect 100 basis points of cuts leaving the terminal rate at 7.25% in 2025.

You can read Momentum’s full report here.

ENDS