South African Inflation Is Nowhere Near Turkey's Scale But Upside Risks Are Rising
When compared with Turkey's latest inflation print of 70% y/y, South Africa's 5.9% looks tame. However, there are upside risks to South African inflation from higher wage growth and further advances in global goods prices. 7% average inflation for 2022 is not unrealistic and our current 5.8% forecast looks low.
An upward shift in inflation expectations is evident, even for 2023, rising in Q1 to 5% from Q4's 4.7%. Expectations will head higher, as suggested by a notable increase in private and public sector wage rise demands- state workers are demanding 10% increases and a single-year pay deal instead of a three-year one. We think core inflation is set to rise to 5% in 2022. We see food and non-alcoholic beverages inflation rising to at 6.5% in 2022 from 6.1% in 2021, despite a good expected harvest. Administered price inflation will remain higher than headline inflation and is expected to average 12.2% in 2022 from 9.2% in 2021, contributing to a high-cost structure of the economy and remaining a major driver of inflation. One particular issue is that South African manufacturers have experienced difficulties replenishing inventories and equipment because of raw material shortages and bottlenecks at ports. Despite improvement in global supply bottlenecks early in 2022, the Kwazulu Natal floods which disrupted Durban port, the Ukraine war and Chinese lockdowns have all reversed this trend. Finally, producer prices rose to a 13-year high of 11.9% y/y in March and could shape the future trajectory of consumer price inflation, as there is an especially strong correlation between South African PPI and goods CPI. Even worse, as the South African Reserve Bank notes itself, 'taking a medium-term perspective, high wage pressures and a closing output gap will further exert upward pressure on headline inflation, even if exogenous price pressures fade quickly'.