Inflation - The worst may be over

This week’s release of the October consumer price index (CPI) brought some bad news, with the annualised rate of consumer inflation rising marginally to 5.9% (from 5.4% in September).

Fortunately, however, there should be no need for alarm over any further significant increases in the general price level. It should be noted that October was a difficult month for the rand/US dollar exchange rate, with the average hitting a level of marginally above R19.

November’s inflation print should already benefit from the strengthening of the exchange rate by more than 3% during the first three weeks of the month, namely to a level of R18.45. Last year, South Africa’s total imports of goods amounted to R1.8 trillion, representing 28% of the country's GDP. A stronger rand (on the back of a slump in the US dollar) invariably has a profoundly positive impact on price stability and this effect could become visible as early as November.

A second reason to be optimistic over the chances of the CPI returning soon to the mid-point of the Reserve Bank’s target range for inflation, is the welcome decline in the oil price, which has a direct bearing on the prices of petrol and diesel.

During October, the price of Brent crude oil hovered between $83 and $91 per barrel, averaging $87.4. Since then, it dropped to below $80 and has averaged just above $81 in November – a decline of 7%. This fortuitous combination of a stronger currency and a lower oil price has already led to lower fuel prices and a further drop in the prices of petrol and diesel are on the cards in December.

A third observation that points to a likelihood of the latest CPI increase being temporary, is related to food inflation, which carries a high weighting in the CPI basket of goods and services, namely 15.3%. The modest increase in this rate during October (from 8% to 8.8%) was caused, inter alia, by the avian influenza and earlier irrigation disruptions for several vegetable products, especially potatoes.

According to the Agricultural Business Chamber (Agbiz), positive interventions in the poultry sector, combined with a reduction in electricity rationing and investments in alternative energy sources, should help to ease food price pressures in coming months. Agbiz remains optimistic that South Africa’s food price inflation will return to a moderating path going into 2024.

Against the background of persistently high unemployment and low GDP growth, it would be a mistake for the Monetary Policy Committee of the Reserve Bank to raise interest rates again. South Africa has one of the highest real interest rates in the world and, with inflation pressures likely to ease in coming months, the next interest rate movement could well be downward.