The Bureau of Economic Research at Stellenbosch University has released its third-quarter survey on inflation expectations and, writes Johann Els, chief economist at PSG Financial Services, it was quite encouraging.
First, the overall survey results showed unchanged or lower inflation expectations, whether for the current year or over five years. This is very encouraging. While most of the expectations did not decline to levels seen in the first quarter, they were down from the second-quarter survey numbers. Many expectations out there had expected them to be higher still.
If we concentrate on household inflation expectations, these showed a significant decline in the third quarter. Between the second and third quarters, 12-month inflation expectations fell from 6% to 4,9% – the lowest level in about five years. So that would be very encouraging for the Reserve Bank in terms of inflation expectations driving actual inflation.
The five-year expectations came down from 9,1% to 8,3%. And it was quite broadly based across various income groups.
When we look at inflation expectations for analysts for the current year, that was unchanged between the second and third-quarter surveys, slightly down for 2027. And for 2028, unchanged at 3,4%. The five-year expectations were also unchanged at 3,5%.
Trade union officials are also a fairly important group when we think about wage demands and the impact of wage growth on inflation, and that’s important for the Reserve Bank to watch closely.
Trade union inflation expectations were unchanged for the current year between the second and third-quarter surveys. For 2027, that’s down from 4,4% in the second quarter to 4,1%. And for 2028, down from 4,4% to 3,9%. The five-year outlook was down from 4,7% to 4,3%.
This is crucially important in terms of inflation expectations driving wage demands and, ultimately, inflation, in terms of both trade union expectations and household expectations.
This is very encouraging when we think of the MPC meeting coming up next week. I think the Reserve Bank will keep rates unchanged, not only because of the early rate hike in May, with many other central banks still having not moved interest rates. That very early rate hike limits the need for further rate increases, especially against the backdrop of these lower inflation expectations in the third quarter of this year.
There is concern about ongoing high oil prices and ongoing high inflation, but that would likely be temporary – and oil prices at some point will come down. Basically, that will also help inflation. The fact that inflation expectations have come off, that’s a key part of this argument.
I think the Reserve Bank will keep rates unchanged. I do not think the Fed’s decision today will have a significant impact on the Reserve Bank. Even if the Fed hikes, I still think the Reserve Bank will keep rates unchanged.
However, I think there’s a strong argument for the Fed to keep rates unchanged. Disinflation seems to have continued over the last few months, and further disinflation is expected. Wage inflation is 3%, down significantly over the past few years and probably more in line with the Fed’s 2% inflation target. Also, market interest rate increases, especially on the long end, are doing a huge part of the Fed’s job.
While it’s a close call, I think the Fed will also keep rates unchanged.
As I said, even if the Fed hikes, I think the Reserve Bank will keep rates unchanged.
This was a very positive inflation expectations survey.