Data from Statistics South Africa on Wednesday (24 March), showed that South Africa’s headline consumer price inflation slowed to 2.9% year-on-year in February from 3.2% in January.
Month-on-month (m/m) inflation rose by 0.7% in February compared to 0.3% in January, the data showed.
The main drivers behind February’s monthly increase were the fuel and medical insurance categories, while meat, housing, water and electricity, new vehicles and medical insurance contributed most to the y/y increase.
Economists at Momentum Investments warned that the CPI is expected to gain pace in the next few months, before subsiding. They said that a 22.6% increase in minimum wages for domestic workers coupled with higher fuel prices are likely to contribute to pressure on March’s price inflation numbers.
Johann van Tonder, economist at Momentum said that that CPI is set to ‘really accelerate’ from April onwards on the back of a low base and higher food and fuel prices. Indications are that CPI can rise above 5%, after which the increase may subside, Momentum said.
He forecasts that food is likely to pose the most upward pressure of inflation in the coming months, as well as vehicles, fuel and alcoholic beverages.
Owners equivalent rent and medical insurance are likely to exert downward pressure.
On February’s CPI, Statistics South Africa said that this is the third time in the past 12 months that the annual rate has slipped below the bottom end of the South African Reserve Bank’s inflation target range. Inflation was below this 3% level in May and June last year.
Medical insurance is the single biggest item in the CPI basket, taking up 7.6% of total household spending. The average annual increase across medical aid schemes surveyed in February 2021 was 4.7%, substantially lower than the rate recorded in February 2020 (9.6%).
In its analysis, Momentum noted that CPI is experiencing a constant upward momentum from some food prices and higher fuel prices, while higher excise duties on alcohol and tobacco (8% increase) drove CPI higher than it would have been.
Head of investment research & asset allocation at Momentum Investments, Herman van Papendorp said that food prices are encountering pressure from a number of sources. Internationally, it stems from China’s rising demand for grain, while local palm oil supplies drive vegetable oil prices higher.
As grain as used as an input for animal feed, it also puts upward pressure on meat prices.
International oil prices have also continued an upward trend due to higher demand, with the Brent oil price 13.3% higher in February than it was in January.
After four consecutive months of local price decline, fuel recorded a month-on-month rise in prices in January. Prices increased further in February, rising by 5.2% month-on-month. The price of inland 95-octane petrol increased by 81 cents to R15.67 per litre between January and February.
Inflation expectations for 2021
The Bureau for Economic Research said in a research note that in the first quarter of 2021, average expectations of analysts, business people and trade unions are that headline consumer (CPI) inflation will be 3.9% in 2021, 4.2% in 2022 and 4.4% in 2023.
“It is rare in the survey’s history of 21 years that the expectations of business people match those of analysts and that the expectations of trade union representatives are below those of analysts.”
It said that last year’s lower measured inflation outcome (from 4.1% in 2019 to 3.3% in 2020), amongst other things, may have contributed to the first quarter’s decline in inflation expectations, especially those of business people and trade union representatives.
“However, it is noteworthy that the expectations of all groups for the current year, one year ahead and two years ahead changed little relative to the fourth quarter despite the lower measured inflation outcome.
“Five-year inflation expectations edged lower from 4.7% to 4.6%. Whereas business people and trade unions lowered their forecasts by 0.2 percentage points, analysts revised their forecast upwards by 0.2% points.”
Having hovered around 6% in the second and third quarter, household inflation expectations moderated to 5.3% in the fourth quarter and further to 5.0% in the first quarter of 2021, The BER said.
“The average GDP growth forecast of the three social groups during the first quarter of this year was 1.2% for 2021, versus a forecast of 2.0% previously. They expect a slight uptick to 1.3% next year as trade unions and businesses foresee normalised growth while analysts expect the base effect to dissipate.”
Regarding salary and wage increases, The BER said that on average the three groups expect an increase of 4.3% during 2021, largely unchanged from before. However, they expect wage increases to accelerate slightly next year to 4.7%.
Repo rate
The Monetary Policy Committee meanwhile decided against altering the repo rate, keeping it unchanged at 3.5% per annum, Reserve Bank governor Lesetja Kganyago said on Thursday afternoon (25 March).
Kganyago said the decision was unanimous. The governor said unless the risks outlined earlier materialise, inflation is expected to be well contained in 2021, before rising to around the midpoint of the inflation target range in 2022 and 2023.
“Against this backdrop, the MPC decided to keep rates unchanged at 3.5% per annum,” he said.
Kganyago said the implied policy rate path of the Quarterly Projection Model (QPM) indicates an increase of 25 basis points in each of the second and fourth quarters of 2021.
“Compared to the previous meeting, the shift in the rate path from the third to the fourth quarter is due to somewhat lower inflation in 2022. Monetary policy continues to be accommodative, keeping financial conditions supportive of credit demand as the economy recovers from the pandemic and associated lockdowns,” he said.
