Absa has warned the cost of living in South Africa will rise even further towards the end of the year, in spite of easing global oil and food prices.
Absa macro-economist Miyelani Maluleke yesterday said the second-round effects of supply side price shocks continued to drive up inflation, forcing aggressive monetary policy decisions.
Maluleke said they believed the headline consumer price index (CPI) inflation would peak at 7.9 percent in October, before softening to end 2023 at 4.7 percent.
Headline consumer inflation surprised on the upside and surged from 6.5 percent in May to 7.4 percent in June, its highest level since 2009 and mainly driven by higher fuel and food prices.
Maluleke said core inflation would be critical for the path of headline inflation into 2023, as it had risen more than expected to 4.4 percent, its highest level since March 2019.
“We now see headline CPI inflation averaging 7 percent this year. Our previous forecast was 5.9 percent,” he said.
“We forecast food inflation to rise further from 8.6 percent currently to peak at 11.5 percent in November, and then ease to 4.8 percent by end-2023.”
Consumers in South Africa are in for a decrease of more than R1 in fuel prices for August, as the price of Brent crude oil has declined by about 10 percent on average compared to the average price last month.
Food prices are also expected to ease slightly after warring countries Russia and Ukraine signed an agreement for free movement of grain exports from the Black Sea ports.
In spite of this, Maluleke said the degree of uncertainty around the global supply chains was still quite high.
“Crop prices have also started to come down a bit, but I think we shouldn’t discount the current uncertainty,” he said.
“Even this slight softening in crop prices… If it is sustained, we could see food price inflation peaking in November sometime, and starting to calm down a little into next year.
“This would fulfil our view that it will remain fairly elevated for some time, but not go much higher,” Maluleke said.
Multiple supply side price shocks and continued post-pandemic recovery prompted the South African Reserve Bank (Sarb) to hike interest rates by 75 basis points in July.
This took the repo rate to 5.50 percent and 200 basis points higher than its pandemic lows.
Sarb has expressed concerns about rising inflation expectations, which have continued to de-anchor from the 4.5 percent mid-point of the target range.
“We believe that bringing inflation expectations back to 4.5 percent would require Sarb to tighten (monetary policy) even more. So our baseline is that we are going to see two more interest rate hikes of 75 basis points at the September and November Monetary Policy Committee meetings,” Maluleke said.
“We pencilled in another 50 basis point hike in January 2023, which basically takes the repo rate to 7.5 percent.”
Other economists, share this view. Annabel Bishop, chief economist at Investec, said in a note last week that Sarb could move interest rates up by another 75bp or 100bp in September.
Absa forecast that South Africa’s gross domestic product (GDP) growth should still come in a respectable 2.3 percent for 2022, but average 1.6 percent in 2023 to 2024, due to the multiple headwinds and constraints.
This economic growth outlook is in line with the International Monetary Fund, which this month forecast GDP growth at 2.3 percent this year, while Sarb expects 2 percent in 2022.
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