After breaching the upper end of the African Reserve Bank’s 3%–6% target band last year and reaching a 13-year high of 7.8% year-on-year in July, consumer inflation appears to be in retreat, although the outlook for 2023 remains firm. indefinite.
The latest data released by Statistics South Africa (StatsSA) on Wednesday showed that inflation fell for the second consecutive month to 7.2% year-on-year in December from 7.4% in the previous month, and economists said it was on a downward trend despite The central bank’s monetary policy committee (MPC) must remain “vigilant” in order to return to its target.
In face value, December’s inflation figures are encouraging, said Kevin Lings, chief economist at Stanlib.
“They are moving in the right direction. If you go back to July last year, this was peak inflation and we have come down from that peak. It is moving lower and should be lower during this year,” said Lings.
But he cautioned that upside risks remain.
“With electricity up 18.65%, that’s pushing the Reserve Bank’s own inflation forecast. When electricity goes up, it puts price pressure on other parts of the economy. Manufacturers now have to pay more, businesses generally pay more and have to consider whether they’re going to apply some of that price pressure and there will be that desire, but it can’t go through all because the economy is weak and consumers are not strong. weak,” said Lings.
“We expect inflation to be 5% by the end of the year. But at this point, we can’t be sure that it will happen because if electricity prices rise by 9% instead of 18%, then you can be sure.
Last week, South Africa’s National Energy Regulator (Nersa) granted Eskom an 18.65% tariff increase to help cover debt.
Investec chief economist Annabel Bishop agreed with Lings that higher electricity costs would hamper inflationary progress.
“Looking forward, South Africa will see upward pressure from a larger-than-expected 18.65% increase, with Stats SA usually taking annual electricity price increases for CPI inflation in July,” Bishop wrote in a note.
He added that risks to the outlook include a weaker-than-expected GDP growth rate as heavy electricity loads remain this year and further losses in investor sentiment.
Without fuel price increases or other surprises, inflation could fall to 4.3% year-on-year in July from 4.9% year-on-year in June, Bishop said, citing a high base from a comparative year when inflation peaked. at a 13-year high due to fuel and food prices.
Economists at Nedbank forecast average inflation of around 5.5% for 2023 compared to 6.9% in 2022 and 4.6% in the previous year. Rising food and petrol prices were mainly blamed last year on Russia’s war in Ukraine.
Nedbank said the risk to the inflation outlook remains high, emanating mainly from global oil prices, vulnerable rand and regulated prices, especially electricity tariffs.
“South Africa’s National Energy Regulator has given Eskom permission to increase electricity prices (and) while this is lower than the expected 32% increase, it will still be a significant contributor to inflation. These factors could cause inflation to remain high for longer or to decline at a lower rate slower,” the bank said.
Sanisha Packirisamy, an economist at Momentum Investments, said inflation will return to the target range by mid-year and fall below the 5% mark by the end of the year.
Monetary Policy Committee
The central bank’s MPC expects inflation to remain above the upper bound of its target range until the second quarter of 2023. The Reserve Bank is expected to continue hiking rates, albeit at a slower pace, until it is confident inflation will return to the midpoint of its forecast horizon.
The MPC will hold its first meeting of the year next week. That would likely prompt another rate hike of about 25 basis points, Lings said.
“The MPC will send a message acknowledging that there is progress in controlling inflation but there is a risk due to the increase in electricity and therefore it is possible that it will increase other interests, but little,” he said.
“They have to be careful because you can’t be satisfied that inflation will return neatly to the target. If it returns neatly to the target, then it can cut rates at the end of the year.
Bishop predicts 50 base points increase.
According to Packirisamy, there are several things that affect the decision of the monetary policy committee today, among them is the weak dollar, which helps emerging market currencies.
“The market is looking for a bigger addition of about 50 basis points. I would say right now the market has moved and we expect an additional 25 basis points. We think we will get a cumulative of 50 basis points for the first quarter, so, 25 basis points in January and 25 basis points points in March,” Packirisamy said.
“Beyond that, I think you will start to affect growth without having a significant impact on inflation because in South Africa inflation is already higher because of exogenous food costs, exogenous petrol costs and fuel costs.”