David Rees, Senior Emerging Markets Economist at Schroders

Inflation in South Africa has continued to surprise to the upside in the past couple of months. The South African Reserve Bank (SARB) unexpectedly hiked rates by 50bp to 7.75% at its last meeting in late-March, and the further increase in headline inflation is likely to concern policymakers.

However, there are three reasons to think that inflation should come down in the months ahead, and that the South African Reserve Bank (SARB) will eventually start to consider easing policy again.

First, fuel inflation has already begun to drop sharply and should fall a bit further before stabilising.

Second, while the upside surprise to March inflation was due in large part to the food component, our leading indicator suggests that it should now be around its peak. Crucially, our it implies that food inflation will fall by about 10 percentage points into year-end. Food is around a fifth of the CPI basket, meaning this could knock about 2 percentage points off headline inflation in the second half of this year.

Third, tighter monetary policy is a clear downside risk to economic activity and a slowdown/recessionary environment would usually cool core inflation. If that happens, then the focus of markets and policymakers would eventually start to shift back from fighting inflation to supporting the economy.

ENDS