Inflation has breached the ceiling of the Reserve Bank’s target range for the first time in more than five years
Inflation accelerated to 7.4% year-on-year in June, as elevated food and fuel prices continue to choke consumers.
According to Statistics South Africa’s numbers, consumer inflation recorded another steep rise after surging to 6.5% in May. At 7.4%, inflation has risen to its highest rate in over a decade.
The previous print marked the first time inflation rose above the upper limit of the South African Reserve Bank’s 3% to 6% target range in five years. Consensus expected inflation to accelerate at a slightly slower rate in June, forecasting 7.3%.
Inflation was driven by high food and fuel prices, which have been exacerbated by Russia’s assault on Ukraine.
The oil price, which has risen to 14-year highs amid sanctions on Russia, has now fallen from its June peak of $119 dollars a barrel but stands above the $100 mark. Oil prices have slowed as signs of a demand-sapping global recession ripples through financial markets.
But weaker oil prices have not yet resulted in relief for South Africa’s motorists, who had to budget for yet another petrol price increase in July. The price of 95-octane petrol rose to a record high of R27.74 a litre, from R24.17 a litre last month.
According to the Automobile Association of South Africa, August may offer consumers some respite, with fuel prices expected to drop across the board. The drop in international crude oil prices is driving the decreases but they are being offset by a weaker rand to dollar exchange rate.
“Decreases offer immediate relief but increases filter into the economy over time, especially as those sectors affected by them don’t immediately adjust their prices downward but instead wait for more consistent fuel cuts that lower their input costs,” the association noted in a statement.
“We stand by our call that a review of the fuel price structure, and an audit of the components that comprise the fuel price, is essential and long overdue to offer sustainable solutions that mitigate against rising fuel costs in the country.”
With domestic inflation continuing to surprise on the upside, and as central banks in advanced economies have tended towards a more hawkish stance, South Africa is in for another repo rate hike.
The Reserve Bank is expected to follow up the 50 basis point hike in May with a similar move. But some — such as the Bureau for Economic Research — think that the bank’s monetary policy committee could announce a 75 basis point hike on Thursday afternoon.
Also on Thursday, the European Central Bank (ECB), faced with the eurozone’s gloomier economic prospects, is set to announce its first rate hike in over a decade. Although earlier guidance supports a 25 basis point increase, recent reports suggest the ECB is weighing a 50 basis point hike.
The fate of Europe’s economy hangs in the balance amid uncertainty over whether Russia will resume gas exports to Germany following a 10-day maintenance outage of the Nord Stream 1 pipeline. If Moscow decides not to turn on the taps, Europe’s largest economy will face significant strain.