South African inflation will probably hover near July’s reading, of 3.2% y/y, in the coming months and, as the economic recovery wavers, we think that more monetary easing lies in store.
Higher inflation won’t prevent additional easing
- South African inflation will probably hover near July’s reading, of 3.2% y/y, in the coming months and, as the economic recovery wavers, we think that more monetary easing lies in store.
- Figures released this morning showed that South African inflation rose from 2.2% y/y in June to 3.2% y/y in July, slightly above the lower bound of the Reserve Bank’s 3-6% target range. (See Chart 1.) The outturn was stronger than both our forecast of 2.8% y/y and the Bloomberg consensus projection of 3.0% y/y.
- With the gradual loosening of South Africa’s lockdown measures, the challenges for StatsSA in calculating the CPI have eased as well. From the height of the lockdown in April, when only about a third of the CPI basket was measured, the July CPI was calculated by directly measuring almost 65% of the basket (with about 32% not due to be collected anyway).
- Th increase in the headline rate last month was largely attributable to higher transport inflation as local fuel prices rose on the back of the recovery in global oil prices. Higher regulated petrol prices pushed up transport inflation from -5.9% y/y in June to 0.0% y/y in July, boosting the headline rate by 0.9%-pts.
- Inflation pressures picked up in other major price categories too. (See Table 1.) Food inflation ticked up from 4.2% y/y in June to 4.3% y/y in July. And core inflation climbed from 3.0% y/y in June to 3.2% y/y last month. Housing inflation, by contrast, softened from 4.0% y/y to 3.2% y/y.
- We think that the headline rate will hover around 3%, the lower bound of the target range, in the coming months. Even as a continued rebound in global oil prices will keep pushing up transport inflation, core price pressures are likely to stay subdued as a large output gap persists. While policymakers sounded less dovish at their July meeting, if we’re right on the inflation outlook and the economic recovery being weaker than the Reserve Bank currently expects, further easing seems likely. We’ve pencilled int two additional 25bp rate cuts this year, to 3.00%.
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
Virág Fórizs, Africa Economist, email@example.com