Statistics South Africa (Stats SA) reported on August 25 that consumer price inflation increased from 2,2% year-on-year (y-o-y) in June to 3,2% y-o-y in August.
Article by Lullu Krugel, chief economist for PwC Strategy Africa, and Dr Christie Viljoen, PwC Strategy& economist, unpack the latest figures.
Consumer price inflation was higher than expectations (2,9% y-o-y) and the highest reading since the national lockdown started. The South African Reserve Bank (SARB) said in July that it expects average inflation of 2,5% y-o-y in the second quarter; this reading for July suggests that this mean projection could be too low.
However, in the context of South Africa’s inflation target of 3%-6%, current readings are still very favourable from a monetary policy perspective – the 3,2% y-o-y reading in July is firmly near the bottom of the target range.
The major driver behind the increase in July’s headline inflation was the end to transport cost deflation. Private transport operation was recently in y-o-y deflation, largely due to a favourable global energy environment.
However, recent local fuel price increases have rolled back this benefit. Furthermore, the purchase price of new vehicles increased by 3,9% y-o-y in July. This reflects the impact of a notably weaker rand exchange rate on the price of imported goods.
The South Africa currency is currently trading around 10% weaker against the US dollar compared to a year ago – the fourth-largest depreciation amongst major currencies behind the Brazilian real, Russian ruble and Mexican peso.
Due to recent weakness in the rand, South Africa’s import basket (excluding crude petroleum) cost 3,4% more in May (latest available data) compared to the previous month.
The annual increase in electricity prices had a negligible impact on headline inflation in July. Stats SA measured a 6,2% increase in the cost of electricity & other fuels in July compared to the previous month. This was more moderate than the 10,3% increase seen for the category in July 2019.
However, while this is positive news for the current pricing environment, power utility Eskom recently won a court battle to raise its tariffs by a larger margin over the next three years. Electricity (and other administered prices) have this year been the main key upside risks to the inflation outlook: amidst a weak private sector economy and businesses severely tightening their belts, administered prices are amongst the few cost points that can be increased by a significant margin.
The MPC said in July that its Quarterly Projection Model (QPM) – which considers inflation and economic growth considerations – indicates room for another 25 basis points cut in the repo rate before year-end.
The govenor commented on August 19 that the inflation outlook towards end-2021 is not a point of concern for the SARB at present. He added that if forthcoming (inflation) data tells the MPC that it has scope to provide further monetary policy easing, there is room to do so.
However, it must also be noted that, at the most recent MPC meeting, the decision to reduce lending rates was made with a 3:2 vote. In other words, not all MPC members are necessarily inclined to vote for further rate cuts going forward.
PwC expects inflation to average 3,6% this year. The large recession – our baseline scenario sees the economy shrinking by 10,4% in 2020 – will keep price increases limited.
South African retailers will need to contend with, by our estimates, a net loss of 1,6-million jobs in the country by the end of this year.
The adverse impact that this will have on disposable income and household expenditure will further increase retailers’ inability (as seen in recent years) to significantly pass on price increases to strained consumers.
PwC sees room for a little more monetary policy easing from the SARB – there is currently not much room left to further open the taps.
A key near-term development in the interest rate outlook will be the release of official GDP data for the second quarter on 8 September. When the MPC meets again next month, it will have access to this data, and be able to finetune its own projections for the South African economy.
PwC anticipates a roughly 30% y-o-y plunge in economic activity during the April-June period.
The SARB said in July that it forecasts a full-year economic contraction of 7.0% this year which we think is too conservative. Our current projection of a 10,4% full-year decline includes consideration for significant levels of loadshedding during the remainder of 2020 which the central bank might not have planned for.
If the Q2 GDP data is much worse than the SARB anticipated, and its full-year recession forecast for 2020 deepens, the MPC could see room for more interest rate cuts over the next 12 months.