Inflation now expected to average 5.1% this year

The inflation expectations of analysts, business people and trade unions declined further in the third quarter, with inflation now expected to average 5.1% this year.

They believe inflation will subside to 4.8% in 2025 and 2026.

According to the Bureau for Economic Research (BER) Inflation Expectations Survey for the third quarter, analysts, business people and trade unions still expected consumer inflation to register 5.3% this year and fall to 4.9% in 2026.

The South African Reserve Bank (Sarb) commissioned the BER in 2001 to conduct a quarterly survey to measure inflation expectations and other macroeconomic variables related to inflation, covering four social groups: analysts, business people, senior representatives of trade unions and households.

This is done because each group has a different perspective and impact on inflation as business people affect prices in the real economy, while analysts affect financial markets.

Trade union representatives and households in their role as employees, on the other hand, affect wage increases, which, in turn, have a big impact on inflation.

The results of the inflation expectations survey are one of many factors that the Monetary Policy Committee (MPC) of the Sarb considers when it decides on the repo rate.

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Inflation expectations of various social groups

The BER says analysts expect the lowest inflation rate over the entire forecast horizon, although trade union officials are not far above them. In contrast, business people anticipate that inflation will remain above 5% for all three years, softening from 5.4% this year to 5.2% in 2026.

“Overall, the three social groups expect inflation to average 4.8% over the next five years, slightly lower than the 4.9% they expected before. However, in this case, only analysts expect a rate close to the target of 4.5%, while trade union officials foresee a rate around 5%, similar to business people.”

The inflation expectations of households turned significantly higher, ending the downward trend that started in the middle of 2023. Households’ one-year-ahead expectations picked up by 0.6% to 6.9%, the highest this year. Five-year-ahead expectations increased by 0.9% to 10.6%, the highest since the second quarter of 2023.

The BER points out that the three social groups still expected gross domestic product (GDP) growth of just below 1% in 2024. However, they increased their forecast for next year by 0.2% pts to 1.5%.

Trade unions made a huge upward revision to their forecast of wage increases and now expect wages to increase by 5.6% in 2024 and by 5.9% in 2025. Consequently, the average forecast for 2025 increased slightly from 4.9% to 5.0% and for 2026 increased from 4.9% to 5.3%.

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MPC will be concerned if inflation increases

The BER says the MPC will be concerned if inflation expectations increase or are significantly above the midpoint of the inflation target range of 3% to 6% and/or the other inflation indicators deteriorate.

“Rising inflation expectations may, for example, lead to higher wage demands as workers feel they must be compensated for the higher expected inflation in future. Businesses may also adjust their price increases upwards if demand is robust enough.

“To prevent higher expectations from becoming a reality, the Sarb may be forced to increase the interest rate. The opposite happens if inflation expectations and other indicators decline.”