The Bells Are Tolling as the Spiking Cycle Continues: South Africa’s Inflation Jumped to 5.9% in October

Figure 1: CPI Inflation Rate, October 2021 – October 2023

Source: Datastream

Price increases in food and fuel were remarkable last month, which directly hit the consumers purchasing power. Inflation for food and non-alcoholic beverages accelerated for a second consecutive month, rising to 8.7% in October from 8.1% in September. The fuel price index surged for a third consecutive month, rising 6.5% between September and October. (Note: According to Stats SA, the price of inland 95-octane petrol rose to R25.68 per litre in October from R24.54 per litre in September, which marks this is the second highest price for petrol ever – just below the record R26.74 charged in July 2022). Transport inflation quickened to 7.4% from 4.2% in September, which was also notable and closely linked with the jump in the fuel prices. Restaurants and hotels registered an annual price increase of 6.3%.

As the South African Reserve Bank (SARB) rightly announced in its last Monetary Policy Review, it appears dry weather conditions and elevated inflation expectations continue to negatively impact the inflation outlook while upside risks to inflation had strengthened over the past few months. The adverse outlook was partly propped by surging financial concerns. According to Bureau for Economic Research (BER), the Medium Term Budget Policy Statement (MTBPS) which was announced on November 1 showed the deterioration in the government's fiscal position compared to expectations in February's Budget as the National Treasury's monthly release of revenue data also demonstrated a likely revenue shortfall for this fiscal year.

Despite this, we think the inflation outlook was partly relieved in October due to a number of reasons. First, the fluctuation in the currency was very limited between October 1 and 30, with a mere 0.2%. Another important reason was that instead of surging higher, the Brent crude oil price has come down by about $10/barrel since the most recent MPC meeting. Besides, the frequency and intensity of electricity power cuts (load shedding), which remains as a consistent headwind for the country, relatively eased in October, alleviating risks on the cost of doing business and the cost of living. PMI data has also remained soft.

Since inflation is still within SARB's target 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 unchanged at 8.25% on its next MPC meeting scheduled for November 23. We foresee 2024 general elections may also cause a burdensome on the already struggling budget as we expect populist spending to increase before the elections. In light of risks like ongoing power and logistics crisis worsening, and residual strong inflation expectations materializing in the near term, SARB would have to remain vigilant to act should risks to the inflation outlook worsening, which can easily affect the fragile economy further in the remainder of 2023 and early 2024. While the we expect SARB to signal that it remains on stand-by to lift the policy rate further should data point would demonstrate a reacceleration in price pressure, the reality is that rates have likely peaked.