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  • Writer's pictureAlexander Beard

Good news for consumers in South Africa

Inflation has peaked and should return to its target range of between 3% to 6% by the second quarter of this year, says Absa.

The bank’s latest Q1 2023 Quaterly Perspectives report paints a positive picture for South African consumers; however, the overall economic outcome remains precarious.

According to Absa, the base effect on fuel and food price inflation combined with modestly rising core CPI inflation should see headline CPI falling below 6% in May 2023 and sustainably return to the target mid-point by mid-2024.

According to Statistics South Africa (Stats SA), recent core CPI inflation data from December 2022 is sitting at 7.2% in December 2022, down from 7.4% in November 2022.

The key factors behind the 7.2% inflation rate recorded in December were primarily food and non-alcoholic beverages, housing and utilities, transport, and miscellaneous goods and services, reported Stats SA.

The average annual CPI figure for the whole year was 6.9%. The next indication of where inflation is heading is set to be released by Stats SA this week, Wednesday (15 February).

In a more short-term view, according to the Bureau of Economic Research (BER), January outcomes are expected by the markets to continue further on a downshift to 6.9% year-on-year in light of the rate at which headline CPI eased from July 2022 to December 2022.

Absa noted that despite a positive outlook in general, against a backdrop of China’s reopening, oil prices remain an upside risk for our forecast inflation trajectory, while the business’s expenditure on backup diesel generation in the face of intense load shedding is a cost-push upside risk.

Absa forecasts CPI inflation to average 5.5% this year.

“The big global inflation surge of the past couple of years is now clearly in the rear-view mirror, as many of the adverse price shocks, including supply bottlenecks, escalated shipping costs, and a war-induced surge in energy and food prices have abated,” said Absa.

In emerging markets such as South Africa, the focus has now shifted to how quickly inflation will return to the central bank’s targets, said Absa.

The graph below shows Absa’s predictions for CPI in the coming months:


Fuel inflation has been a key driver of the softening, owing to the combination of some cooling in Brent crude oil prices and base effects, Absa said.

It noted, however, that while fuel prices are important for the path of headline CPI inflation, these can also be highly volatile.

The bank’s baseline forecast assumes that Brent crude oil prices would track sideways, just below 90$ per barrel over this year’s first half, then drifting down to 80$ per barrel by the end of 2024.

“Given our exchange rate forecast, this leaves fuel inflation falling sharply from 26.1% y/y in Q4 22 to just 2.2% by Q2 23 and -7.4% by Q3 23, said Absa.

Although Absa’s predictions show a downward trend in fuel prices, the BER noted that a weak rand and rising global prices might see motorists face an increase at petrol stations in March.

The Central Energy Fund’s latest data points to the price of petrol increasing by R1.20 per litre and diesel by around 40 cents per litre due to under-recovery.

The graph below shows fuel inflation expectations easing from the start of January this year:


According to Absa, food prices have started to ease, with domestic crop prices also softening.

The easing cost of production appears to be transmitted to food producer prices, said Absa.

Consumer food inflation also appears to have peaked after easing just marginally in December for the first time in eight months to 12.4% y/y.

With global food prices seemingly contained, the bank expects domestic food price inflation to ease further, averaging 7.6% this year and 4.6% in 2024 versus 9.2% in 2022, said Absa.

Despite this, knock-on effects from continual load shedding continue to take a toll on the agricultural industry – threatening food security at large in South Africa.

Farmers in both meat and harvesting industries have reported that load shedding is wreaking havoc on businesses.

Roelie van Reenan, an executive at Beefmaster Group, said that unrelenting load shedding is taking a toll on farming infrastructure – pushing up the cost of production.

Increases in production costs are often passed on to the consumer and may lead to shortages or price hikes.

The graph below highlights the deflation in domestic producer prices:

Electricity warning signs

Bloomberg reported that domestic factors may still hamper the country’s inflation slowdown.

“South African inflation slowed to a seven-month low in December, though mounting price pressures including a sharp increase in electricity costs may force the central bank to keep interest rates higher for longer,” reported the publication.

Absa said that the recent 18.65% electricity price hike, tabled by the National Energy Regulator of South Africa, was significantly larger than the bank had expected.

The price hike is expected to come into effect on 1 April 2023 – affecting all direct Eskom customers, including municipalities.

“We estimate that tariff increases that will kick in across various municipalities, and therefore in the CPI, will come in at 17.4% in July 2023 and 8.6% in July 2024 after the Eskom Retail Tariff and Structural (ERTSA) adjustments,” said Absa. Warren Berriman

Managing Director - Alexander Beard RSA (Pty) Ltd.


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