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A view on the latest inflation release and the impact on the next interest rate decision

A minor 0.1% miss on expected inflation figures resulted in a relatively subdued response from financial markets to Statistics South Africa’s (SA) latest consumer price inflation report for April.  Forward-rate agreement (FRA) markets did however reprice slightly on the back of a more favourable inflation outcome. The headline inflation rate dropped to 5.2% year-on-year (y/y) in April 2024, compared to the Reuters consensus of 5.3% and remained stable from the rate experienced in March. This left the month-on-month increase at 0.3% for April. The biggest downside surprises leading to the below-consensus print, arose from the food category and drop in inflation in new vehicles from 7.2% y/y to 5.7%.

Sanisha Packirisamy, an economist at Momentum Investments, commented, “While meat prices increased by 0.5% y/y – the smallest rise since July 2019 – meat inflation at a producer level jumped to 12.1% y/y in March, signalling higher meat prices ahead. Moreover, a 6% surge in agricultural crop prices at the producer level flags concerns over bread and cereal inflation for consumers in the coming months, despite having dropped to 4.3% y/y in April (the lowest level since February 2022). Encouragingly, weather-related concerns have abated somewhat since the start of the year. The latest revised expected harvest figures by the Crops Estimates Committee remained below their initial set of forecasts. Importantly, however, the impact of El Niño is anticipated to be far milder than what was previously assumed. The latest estimates suggest the crop size will be also likely be marginally higher than the long-term average since 2009 and more than 70% bigger than the final crop size for 2016, a year in which severe El Niño conditions affected crop production.”

Packirisamy noted, “Fuel inflation rose for a fourth consecutive month to 8.6% y/y, driven by a significant 67 cents per litre increase in April. May saw a further 37 cents per litre rise; however, the current over-recovery for June signals a substantial 83c/l drop. While the escalating conflict in the Middle East poses a risk of higher international oil prices, financial markets have remained relatively calm, not yet pricing in the potential for a full-scale war.”

Core inflation also surprised positively (falling to 4.6% y/y in April from 4.9% previously) given the steep drop in services inflation. Packirisamy acknowledged the South African Reserve Bank’s (SARB) concerns over the rising contribution of services inflation to overall inflation, reflecting global trends of stickier inflation. The International Monetary Fund’s latest World Economic Outlook for April noted that progress on disinflation had been disrupted by persistent services inflation and increasing geopolitical tensions, which have led to trade restrictions and higher food and fuel prices. Nonetheless, services inflation in SA dropped back encouragingly to 4.6% y/y in April. “This was accompanied by a drop in the median rate of inflation to 4.4% y/y in April from 4.7% in March. However, the trimmed mean inflation rate, which excludes the most volatile items in the consumer basket, rose to 5%, indicating some evidence of price pressure in the basket. Without the impact of administered price inflation, which picked up to 8.8% y/y in April, CPI excluding these prices dropped to 4.5% y/y. Regulated administered price inflation has averaged at a significant 8.3% since the start of the year,” said Packirisamy.

It is anticipated that the SARB will maintain interest rates at 8.25% in May and only start cutting rates in the third quarter. Despite the favourable surprises on both headline and core measures of inflation today, there is an increased risk of a delayed interest rate-cutting cycle due to global and local factors affecting inflation expectations and recent warnings from the United States Federal Reserve, in particular, about the risks of premature easing. “While we expect four interest rate cuts of 25 basis points each between this year and next, there are still risks attached to a later and more gradual interest rate-cutting cycle,” said Packirisamy.

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