Statistics South Africa (StatsSA) reported on September 21, that headline inflation decreased from 6% year-on-year (y-o-y) in July to 5.9% y-o-y during August. The latest y-o-y figure (calculating the change over a 12-month period) was below market expectations of 6% y-o-y and the first reading to fall within the South African Reserve Bank’s (SARB) target range of 3% - 6% since December 2015.
This positive development was supported by the consumer price index (CPI) declining by 0.1% month-on-month (m-o-m) between July and August. Petrol was 7.6% m-o-m (99c/litre) cheaper as a result of a stronger rand exchange rate and lower international fuel prices. In addition, price indicators for medical products and vegetables were on average 0.5% m-o-m lower last month.
The benchmark food basket cost 0.9% m-o-m more in August. StatsSA recorded a 1.5% m-o-m increase in processed food prices, including a 2% m-o-m rise in the price of bread and cereals. This translated into this basket of staple food items costing 11.3% y-o-y more during the month. Overall, food cost on average 11.6% y-o-y more last month compared to a rate of just 4.4% y-o-y recorded in August 2015.
The Food and Agricultural Organisation (FAO) of the United Nations commented in a report released on September 12, that South Africa’s worst drought in 25 years has left 14.3 million (one in four) of its citizens vulnerable to food insecurity. On a positive note, the National Agricultural Marketing Council (NAMC) said in a report published on August 31 that “food inflation is losing momentum” and could possibly return to single digits (i.e. below 10% y-o-y) in coming months.
The SARB MPC will take this information into account during its current deliberations over interest rates. Policymakers are in a three-day meeting and will on Thursday afternoon reveal their inflation forecasts and interest rate stance. A recent Bloomberg survey amongst 27 local economists indicates expectations that the SARB will keep interest rates unchanged this week. It is also likely that the MPC will lower their near-term inflation forecasts as a result of the latest StatsSA data.
SARB Governor, Lesetja Kganyago said in a speech on September 7 that the central bank “would like to respond to slow and below-trend [economic] growth with lower interest rates”. However, he indicated that monetary policy decisions necessarily involve trade-offs, and that the MPC “has opted for trade-offs that serve [its] inflation-targeting mandate.” Indeed, price stability remains the primary mandate of the SARB despite weakness in the local economy.
For more information on the MPC’s considerations this week, please see Continued hold on the SARB’s interest rate hiking cycle?