By Lehlohonolo Lehana.
Annual headline inflation climbed above the 4.5% midpoint of the South African Reserve Bank’s monetary policy target range, accelerating to 5.2% in May from 4.4% in April, data from StatsSA shows.
This is the highest reading since November 2018 when the rate was also 5.2%, the stats body said. The 5.2% annual change in May comes off a low base recorded in May 2020, when fuel prices were low.
Core inflation – CPI excluding food & non-alcoholic beverages, fuel and energy – was 3.1% in May 2021, much lower than the headline rate.
This hints at the notable impact that fuel and food inflation has had on overall inflation levels, StatsSA said.
Despite a small monthly drop in the fuel price in May, the annual increase quickened to 37.4% from 21.4% in April.
Petrol prices were 41.8% higher in May compared with the same month the previous year, while diesel was 27% more expensive.
Vehicle prices climbed by 6.5% in the year to May. Other running costs for vehicles rose by 8.9% on an annual basis and by 0.8% from April 2021 to May 2021. Most notably, tyre prices increased on average by 3.3% from April 2021.
Annual food & non-alcoholic beverages inflation meanwhile, accelerated to 6.7% in May from 6.3% in April. May’s reading is the highest since July 2017, StatsSA said.
Arthur Kamp, chief economist at Sanlam Investments said that the latest figures reflect base effects and a substantially higher petrol price relative to a year ago.
The more important question is whether the jump proves temporary or more durable against the backdrop of upside surprises in global inflation.
"Amidst high shipping costs, longer delivery times and lower inventory levels, it seems global supply chains are still disrupted," he said.
Given South Africa’s negative output gap should help contain price increases in 2021 and 2022, inflation is expected to remain close to the mid-point of the Reserve Bank’s inflation target of 3-6% over the medium term. Inflation expectations also remain relatively stable at a low level, Kamp said.
Together with a subdued private sector credit extension, this suggests the Reserve Bank can afford to bide its time – even though its Quarterly Projection Model (QPM) has been indicating interest rate hikes of 25bp in each of the second and fourth quarters of 2021, which implies a repo rate of around 4% by end 2021.
Thereafter, the QPM suggests a further increase in the repo rate to 5% by the end of 2022, the economist said.
"Overall, the domestic interest rate hiking cycle is expected to be modest and slow, but it must be recognised that inflation risk has increased, and much will depend on the future path of US monetary policy, "said Kamp.