Sanisha Packirisamy, Economist at Momentum Investments

• As reported by Statistics South Africa (Stats SA) the consumer price index (CPI or headline inflation) eased markedly from 5.1% year-on-year (y/y) in June to 4.6% y/y in July, coming in markedly below consensus. The main contributors to the softer inflation rate were transport inflation (4.2% y/y from 5.5% y/y in June), food and non-alcoholic beverages (NAB) at 4.5% y/y from 4.6% y/y as well as alcoholic beverages and tobacco (3.8% y/y from 4.3% y/y).

• Core inflation dropped to 4.3% y/y in July from 4.5% y/y in June.

• Municipal tariff hikes (electricity, water and property tax) for 2024/25 came into effect on 1 July 2024. The increases were mostly lower than 2023/24, more notably electricity tariffs because the National Energy Regulator of SA (NERSA) approved a lower rate of 12.72% compared to 15.1% a year ago. Consequently, housing and utilities inflation was lower at 5.3% y/y in July from 5.5% y/y in June.

• According to a High Court ruling in August, 37% of the licensed electricity distributors implemented electricity hikes unlawfully by failing to produce a cost-of-supply study. These municipalities should therefore revert to 2023/24 rates until they produce the required study within 60 days (two months).

• The SA Reserve Bank (SARB) expects electricity inflation to gradually ease over the medium term but remain above the inflation target range by the end of 2026. Although lower electricity tariff increases would be beneficial to consumers’ pockets, this would be detrimental to service delivery because municipalities rely heavily on electricity sales for revenue.

• A lower petrol (ULP 95) price in July was supportive of decelerating transport inflation in the month together with a decrease in the inflation rate of vehicles. The petrol price cut (R0.15/l) announced by the Central Energy Fund (CEF) in August will continue to place downward pressure on transport inflation. The CEF’s over-recovery is pointing towards a R0.78/l cut in the price of petrol (ULP) and a R0.62/l cut for diesel (0.05%) which would take fuel prices back to January 2024 levels.

• The two-pot retirement reform, effective 1 September 2024, has raised many concerns about the inflationary impact since it was announced. A note published by the SARB concludes that the reform is not expected to be inflationary in the first year of implementation. The inflationary impact, albeit minimal, is expected in 2025 (between 0.08 and 0.2 percentage points) and 2026 (between 0.1 and 0.3 percentage points). The inflation impact will vary depending on the amount of money withdrawn (a moderate withdrawal is deemed more likely) and how consumers use the funds (split between consumption and debt repayment).

• Against the favourable July CPI print, the improved inflation trajectory, moderating inflation expectations, a stronger rand and muted demand-pull inflation, we maintain our stance that the SARB will cut interest rates by 25 basis points in the September 2024 meeting to 8% and will follow with three more cuts of 25 basis points each by the middle of next year. This is slightly less than the 135 basis points priced in by the forward-rate agreement (FRA) market by the end of next year.

ENDS