The slight drop in South African inflation, to 3.2% y/y in November, will probably be followed by similarly soft readings in the near term. This, coming alongside a lacklustre economic recovery, means that policymakers are likely to keep monetary conditions loose until at least the end of 2022.
Inflation edges down and will remain subdued
- The slight drop in South African inflation, to 3.2% y/y in November, will probably be followed by similarly soft readings in the near term. This, coming alongside a lacklustre economic recovery, means that policymakers are likely to keep monetary conditions loose until at least the end of 2022.
- Figures released this morning showed that South African inflation edged down from 3.3% y/y in October to 3.2% y/y in November. (See Chart 1.) The outturn was below the Bloomberg consensus estimate of 3.3% y/y, but in line with our own projection.
- Two offsetting forces played out in November. One the one hand, food price pressures picked up further. Following a jump to 5.4% y/y in October, food inflation climbed to 5.8% y/y in November. The recent increase in global food prices appears to be filtering through to consumer prices.
- On the other hand, another drop in petrol prices dragged down transport inflation, which dropped from -0.5% y/y in October to -1.3% y/y in November. The fall in transport inflation outweighed higher food price pressures, dragging down the headline rate. Inflation in other price categories remained broadly stable. (See Table 1.) Core inflation ticked down from 3.4% y/y to 3.3% y/y.
- We think that the headline inflation rate will remain subdued in the coming months, hovering around the lower bound of the Reserve Bank’s 3-6% target range. The “balancing act” between elevated food price pressures and soft transport inflation is likely to continue. The headline rate will probably return below 4% y/y following a spike in Q2 2021 as the effects of this year’s oil price collapse unwind.
- With soft inflation and a lacklustre economic recovery, monetary conditions are likely to be kept loose for a long time. While the rebound in GDP in Q3 was stronger-than-expected, more recent figures point to a stuttering recovery. And concerns about a second wave of COVID-19 as well as harsh fiscal austerity plans pose growing headwinds to the economy. We expect the Reserve Bank to keep its repo rate unchanged at 3.50% until at least the end of 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
Virág Fórizs, Africa Economist, firstname.lastname@example.org