Rate hike likely as December consumer inflation hits 5.9%

Inflation in South Africa is now at levels last seen almost five years ago and is just below the top end of the central bank’s 3% to 6% target range. The South African Reserve Bank – which has already signalled that 2022 will see monetary tightening – will not react to a single indicator, but will be mindful of the outlook against the backdrop of other price pressures.

At 5.9%, the latest Consumer Price Index (CPI) read certainly backs the case for a rate increase sooner rather than later, probably from next week when the Monetary Policy Committee meets. Its key repo rate remains near historically low levels at 3.75%.

The CPI data was unveiled on 19 January by Statistics South Africa (Stats SA), which also said that consumer inflation in 2021 averaged 4.5% compared with 3.3% in 2020. The 2020 average was the lowest in 16 years, underscoring the point that inflation has been moderate by South African standards.

“Historical inflation has averaged above 5% and it has only been managed towards 4.5% over the past few years. So 5.9% is not unusual in a historic context. It does, however, raise a red flag because it is the first time in nearly five years that inflation is that close to the top of the 3% to 6% target range,” PwC economist Christie Viljoen told DM168.

Fuel prices are currently the main driver and will likely remain so for some time, with global oil prices around seven-year highs.

“The record rise in fuel prices is the main factor behind the 16.8% annual rise in the transport index, up from 15.0% in November. Transport inflation contributed 2.3 percentage points to the 5.9% headline rate,” Stats SA said in a statement.

There are also demand pressures slowly emerging in the economy. In another data release, Stats SA said retail trade sales increased 3.3% year-on-year in November 2021, and 1.9% on a monthly basis. Black Friday sales were probably a boost.

In the three months to the end of November, retail sales rose 4.1% compared with the previous three months. But that was off a low base, as the comparative period included July, when the wave of riots and looting erupted.

Inflation is the big number to watch now, in SA and elsewhere. With an unemployment rate of almost 35% and sluggish economic growth, significantly higher inflation could see SA fall into the trap of stagflation.

For now, economists see inflation peaking at these levels. And if food, fuel and electricity costs are stripped from the equation, inflation in December was a far more moderate 3.4%.

Still, there are areas of concern – such as food prices, which could climb higher if the heavy rains of this summer hit crop yields badly.