South Africa’s Inflation Spiked to 5.4% in September
Bottom Line: After increasing to 4.8% Yr/Yr in August, the upward trend was sustained in September as the CPI hit 5.4% due to higher fuel, transport and food prices, continued rand weakening, strong inflation expectations and transportation bottleneck. Department of Statistics of South Africa (Stats SA) announced on October 18 that the main contributors to the spike in September was food and non-alcoholic beverages (surged by 8.1%, YoY), housing and utilities (increased by 5.5% YoY), miscellaneous goods and services (hiked by 6.0%, YoY) and transport (rose by 4.2%, YoY).
Figure 1: CPI Inflation Rate, October 2021 – September 2023
Source: Datastream
Annual CPI amounted to 5.4% in September 2023, up from 4.8% in August. The food and non-alcoholic beverages contributed to the 5.4% annual inflation rate by 1.4 percentage points; housing and utilities by 1.3 percentage points; miscellaneous goods and services by 0.9 percentage points; and transport by 0.6 percentage points.
Price increases in food and fuel were remarkable last month, which directly hit the consumers purchasing power. Prices of food and non-alcoholic beverages rose slightly from 8.0% in August to 8.1% in September, following five months of decline. The fuel price index surged for a second consecutive month, rising 7.6% between August and September.
Stats SA mentioned in its report on October 18 that “The price of inland 95-octane petrol jumped by R1.71 in September, reaching a 13-month high of R24.54”, which apparently led to the pressure both on energy and transportation sectors to be strengthened. The rise in the transport prices, which spiked by 4.2% YoY and contributed 0.6 of a percentage point to the YoY CPI surge, was also notable and closely linked with the fuel prices. Another data worth mentioning was the spike in health prices as the figures showed that annual health inflation jumped from 6.2% in August to 6.5% in September, the highest increase since November 2017.
In addition to currency weakening in September, electricity power cuts (load shedding) and global oil prices picking up remained serious bottlenecks to the inflation outlook. The South African Reserve Bank (SARB) announced in its latest Monetary Policy Review published on October 17 that the rise in oil prices, dry weather conditions and elevated inflation expectations were all negatively impacting the inflation outlook while upside risks to inflation had strengthened over the past months, heightening uncertainty about a precise path for inflation.
In a similar vein, underscoring the risks to inflation, SARB Governor Kganyago also indicated on October 9 that “Among the risks we have identified have been the oil price, food prices, and the possibility of an El Niño effect. (…) We worry about the currency to the extent that it ends up feeding into inflation.”
Additionally, the electricity crisis remains bad and Eskom stated in September that the country went back to Stage 6 load shedding due to the increase in generation planned maintenance and the loss of a further two generation units. Load-shedding and logistics constraints continued to create risks on the cost of doing business and the cost of living, and contributed to inflationary spike.
Since the inflation is still within SARB’s targets inflation of between 3% and 6% and rate is likely to hover around 5% midterm target over the coming months, we still suspect that SARB will wait and see, given that the lagged impact of the tightening cycle is still feeding through, thus will likely keep the rate 8.25% until the end of 2023. (Note: Our 2023 average inflation forecast remains 5.9%). Along the lines of SARB's projection model, it also indicated that the current level of interest rates will be enough to steer inflation back to its targeted midpoint over a medium term. In light of mentioned risks like ongoing power crisis, surging fuel and food prices, a weak Rand, global threats and strong inflation expectations, SARB would have to remain vigilant to act should risks to the inflation outlook begin to materialize, which can easily affect the fragile economy further in the remainder of 2023.