The cost of living in South Africa will not ease anytime soon as the central bank is expected to maintain its hawkish monetary policy stance a bit longer, in spite of consumer prices softening to a seventh-month low in December.
Data from Statistics South Africa (StatsSA) yesterday showed that the annual headline consumer price inflation (CPI) slowed for the second month in a row in December, edging lower to 7.2% from 7.4% in November.
On a monthly basis, consumer prices were up by 0.4%, following a 0.3% rise in November, and slightly above market forecasts of a 0.3% increase.
StatsSA said the December CPI print was driven by the slowdown in transport inflation, which softened for a fifth consecutive month to 13.9% from 15.3% in November due to easing fuel prices.
However, though public transport prices moderated by 0.1% in December, they rose by 16.7% over the year, with long distance bus fares going up by 30.2% in the month due to a seasonal effect.
Prices in the “food and non-alcoholic beverages” category were also sticky, easing only slightly to 12.4% year-on-year from 12.5%, mainly driven by higher food prices.
StatsSA chief director for price statistics Patrick Kelly said that bread and cereal products have had the most significant impact on overall food inflation, with the annual rate reaching 20.6% in December.
However, prices of oils and fats moderated further to 22.4% from the peak of 37.6% in August, and meat inflation slowed to 9.7% in December from 10.5% in November in spite of outbreaks of foot-and-mouth disease.
“The December release concludes the results for the calendar year. Average annual inflation for 2022 was 6.9%, higher than the 4.5% recorded for 2021,” Kelly said.
“The 2022 reading is the highest annual average rate since 2009 when it recorded 7.1% at the end of the global financial crisis.”
The annual core inflation, which excludes prices of food, non-alcoholic beverages, fuel and energy, eased to 4.9% in December, from an over 5-and-a-half-year high of 5% in November.
A number of economists have forecast headline inflation to ease further off a high base throughout 2023 and average towards the upper limit of the South African Reserve Bank’s target range of 3-6% and far from the midpoint of 4.5%.
Nedbank economist Johannes Khosa said the downward pressure would come mainly from transport and food prices, with further cuts in petrol and diesel prices expected as global oil prices recede.
However, Khosa said risks to the inflation outlook remained to the upside, emanating mainly from the global oil price, the vulnerable rand and administered prices, particularly electricity tariffs.
“Global oil prices could rise from the current lower levels as the OPEC+ cartel decided to continue cutting oil production by 2 million barrels per day until the end of 2023 to support the oil price, which is under pressure from slowing global demand,” Khosa said.
“Meanwhile, the National Energy Regulator of South Africa granted Eskom permission to increase electricity prices by 18.7% this year.
“While this was lower than the 32% hike the power utility wanted, it will still be a significant contributor to inflation. These factors could cause inflation to remain high for longer or recede at a much slower rate.”
There has been mounting evidence of waning consumer demand in response to the cumulative 350 basis points interest rate increase by the South African Reserve Bank (SARB) since November 2021.
However, weaker domestic growth prospects, the weaker rand exchange rate, and the continuing hiking of rates in December by advanced economies central banks were downside risks to domestic monetary policy.
In its last meeting in November, the SARB’s Monetary Policy Committee (MPC) hiked its benchmark lending rate by 75 basis points from 6.25% to 7%, rising the prime lending rate to 10.5% per annum.
FNB senior economist Koketso Mano said that this, along with domestic inflation expectations that were yet to sustainably revert to the 4.5% anchor, should prompt further hiking by the MPC this month.
“We expect the pace of hikes to slow to 50 basis points, following 75 basis points hikes in each of the past three MPC meetings, in line with improved emerging markets risk sentiment and the hiking cycle reaching a peak,” Mano said.
“With inflation potentially falling closer to target in the second half of 2023, the MPC would have created sufficient policy space to support the economy towards year-end. There is a risk that the MPC hikes rates by an even more moderate 25 basis points, avoiding too restrictive policy.”
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