/ 23 November 2022

Inflation rises, bucking expectations

South Africa’s prime lending rate stands at 11.75%. Photo: Dean Hutton/Bloomberg/Getty Images

Inflation rose slightly in October, bucking expectations by analysts, who forecast that prices would continue to retreat.

According to Statistics South Africa, consumer price inflation rose to 7.6% year-on-year in October, up from 7.5% the previous month. 

The main drivers of inflation were food and transport costs. Food and non-alcoholic beverages increased by 12% year-on-year, with the oil and fats category emerging as the biggest contributor to higher prices. 

Transport increased by 17.1% year-on-year and contributed 2.4 percentage points to the headline number. Fuel was the main driver in this category.

After two consecutive retreats in the inflation numbers, it was expected to have peaked in July, when the yearly rate hit 7.8%. This was after a year of prices climbing as a result of pandemic and Russia-related supply chain disruptions.

With the October print coming in higher than expected — and with it still well above the upper limit of the South African Reserve Bank’s 3% to 6% target range — continued hawkishness from monetary policymakers is expected.

In the bank’s monetary policy review, published last month, it forecast that inflation is expected to average 6.5% in 2022 and will remain above the 4.5% midpoint of the target range into 2024.

On Thursday, the Reserve Bank’s monetary policy committee (MPC) will announce its decision on the repo rate, which affects the cost of borrowing.

Analysts generally expect another large hike in the repo rate, which is already a hair’s breadth away from its pre-pandemic level. The motivations behind another repo rate hike will probably be similar to those in other meetings, as risks to the inflation outlook remain high.

The dollar’s strength, and the rand’s consequent weakness, will also weigh heavily on the MPC’s decision tomorrow. 

A large section of the analysis in October’s monetary policy review was dedicated to the strength of the dollar, which appreciated sharply amid anticipation of faster rate increases in the US relative to most other advanced economies.

Initially dollar strength came mostly at the expense of other advanced economy currencies rather than those of emerging markets, the monetary policy review noted. But emerging market currencies have also depreciated against the dollar in recent months as a result of further increases in US rates and lower commodity prices.

According to Investec chief economist Annabel Bishop, the domestic currency is on track to average R17.50 to the dollar in the fourth quarter of 2022.

The dollar has recently weakened amid speculation of an impending pivot by the US Federal Reserve and a slowing pace in US interest rate hikes. 

But, even as the dollar’s strength eases and oil prices dip, there is still volatility on the horizon.

According to the International Energy Agency (IEA), oil stocks are trending at their lowest levels since 2004.

“The approaching EU [European Union] embargoes on Russian crude and oil product imports and a ban on maritime services will add further pressure on global oil balances, and, in particular, on already exceptionally tight diesel markets,” the IEA said in its November oil market report. 

“A proposed oil price cap may help alleviate tensions, yet a myriad of uncertainties and logistical challenges remain.”