The rise in South Africa’s headline inflation rate, to 3.2% y/y in January, is likely to be followed by further increases over the next few months but, with the economic recovery still struggling, we think that the Reserve Bank will keep monetary conditions looser for longer than most anticipate.
Inflation edges up and set to rise further, but SARB to stand pat
- The rise in South Africa’s headline inflation rate, to 3.2% y/y in January, is likely to be followed by further increases over the next few months but, with the economic recovery still struggling, we think that the Reserve Bank will keep monetary conditions looser for longer than most anticipate.
- Data released this morning showed that South Africa’s headline inflation rate edged up from 3.1% y/y in December to 3.2% y/y in January. (See Chart 1.) The outturn was in line with the consensus, albeit a touch weaker than our projection for inflation to rise to 3.3% y/y. In month-on-month terms, which tends to be volatile due to seasonal effects, consumer prices rose by 0.3%.
- The government’s decision to raise the lockdown level from tier one to tier three at the end of December in a bid to curb a second wave of COVID-19 meant that StatsSA was forced to impute prices for a number of goods and services, such as alcohol and restaurant meals. In-store collection of prices was also halted, with the agency relying on online portals and telephone calls. A similar process was adopted last year.
- The breakdown of the data suggests that food inflation has now passed its peak. After reaching its highest level since 2017 in December, food inflation eased to 5.4% y/y last month. (See Table 1.) But this was more than offset by stronger inflation in most other categories. In particular, transport inflation jumped from -1.6% y/y in December to -0.4% y/y in January as higher global fuel prices pushed up local fuel prices. Clothing inflation also picked up to a seven-month high. Core inflation held steady at 3.3% y/y.
- We expect headline inflation to pick-up over the first half of this year, peaking at around 5.0% y/y in May, largely due to the unfavourable base effects created by last year’s collapse in global oil prices. But the backdrop of a slow vaccine rollout, continued power cuts and fiscal austerity will hold back the economic recovery and keep a lid on underlying price pressures and inflation is likely to drop back towards the lower bound of the SARB’s 3-6% target range over the remainder of the year.
- Against this backdrop, we expect the Reserve Bank to leave its repo rate unchanged at 3.50% throughout 2021 and 2022. In contrast, investors currently expect 50bp of rate hikes by end-2022.
Chart 1: South Africa Consumer Prices & Policy Rate
Sources: Stats SA, SARB, Capital Economics
Table 1: South Africa Consumer Prices
Source: Stats SA (*) Includes non-alcoholic beverages
Jason Tuvey, Senior Emerging Markets Economist, firstname.lastname@example.org