The rise in South African inflation, to 3.3% y/y in October, was driven by stronger food inflation and so is unlikely to be a major concern for the Reserve Bank. Subdued core price pressures and a weak economic recovery mean that monetary conditions will be kept loose until at least the end of 2022.
Price pressures pick up
- The rise in South African inflation, to 3.3% y/y in October, was driven by stronger food inflation and so is unlikely to be a major concern for the Reserve Bank. Subdued core price pressures and a weak economic recovery mean that monetary conditions will be kept loose until at least the end of 2022.
- Figures released this morning showed that South African inflation picked up from 3.0% y/y in September to 3.3% y/y in October. (See Chart 1.) We expected a slightly smaller rise in the headline rate to 3.1% y/y, and the outturn was also above the Bloomberg consensus estimate of 3.0% y/y.
- A jump in food inflation added 0.2%-pts to the headline rate. Inflation in the food category shot up from 3.9% y/y in September to 5.4% y/y in October. (See Table 1.) Producer price inflation of food products has strengthened in recent months, partly reflecting higher global food prices, and this now appears to be filtering through into consumer prices.
- Higher food price pressures were partly offset by a drop in petrol prices. Fuel price inflation feeds into the transport category, which dropped from 0.3% y/y in September to -0.5% y/y in October. Inflation in other price categories remained broadly stable. Core inflation ticked up from 3.3% y/y to 3.4% y/y.
- We think that the rise in food inflation has further to run and, combined with rising fuel price inflation, will continue to put upward pressure on the headline rate over the next six months. Nonetheless, a weak economic recovery and a large output gap will keep core price inflation soft and the headline rate will probably stay close to the lower bound of the Reserve Bank’s 3-6% target range.
- Policymakers are unlikely to be overly concerned by rising inflation and the divisions on the MPC suggest that additional monetary easing cannot be fully dismissed. More MPC members may be swayed to argue for rate cuts if the recovery falters. Hard activity data for Q3 point to a lacklustre rebound. Even if further rate cuts don’t materialise, low inflation and a sluggish recovery means that monetary conditions are likely to be kept loose for some time – we expect the repo rate to be left at 3.50% until at least 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
Virág Fórizs, Africa Economist, email@example.com