Inflation stays low but expected to increase over coming months

Although South Africa’s inflation rate ticked higher in November to 2.9% — but remains near pandemic-era lows — economists expect that it will increase over the coming months.

Jee-A van der Linde, senior economist at Oxford Economics Africa, says the outcome was somewhat lower than their forecast of 3.2%. “Although headline inflation increased less than expected in November, South Africa’s inflation rate will quicken moderately over the coming months.

“However, the overall outlook remains favourable and consistent with our forecast for quarterly 25 basis points rate cuts, ending in the third quarter of 2025.”

He says they anticipate that the average global oil price will decline to $72.6 per barrel in 2025 from $80.4pb in 2024, despite some volatility caused by the conflict in the Middle East. “Lower oil prices bode well for subdued transport price inflation in 2025.”

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Food price inflation lowest since 2010

Van der Linde points out that despite the latest uptick, headline inflation remains at pandemic-era lows, with food price inflation at its lowest level since December 2010. “Given the benign inflation environment and favourable outlook, South Africa can afford to steadily forge ahead with its easing cycle although the path of monetary policy, generally speaking, has become less certain in recent months.”

Specifically, he says, the risk of slower normalisation of US policy rates puts emerging market central banks on course for fewer rate cuts next year. “However, we anticipate cumulative repo rate cuts by the South African Reserve Bank equal to 75 basis points in 2025.

“We forecast overall inflation will average 4.4% in 2025 compared to the 4.5% anticipated this year.”

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Little monthly pressure from fuel and core inflation

Koketso Mano, senior economist at FNB, the inflation outcome for December was also below FNB’s expectation of 3.2 and that of the market of 3.1%. “There was no monthly pressure as a slight contribution from fuel was outweighed by food deflation.

“Core inflation also had no monthly pressure and softened to 3.7% from 3.9% previously. Services inflation eased to 4.3%, from 4.4% previously, while core goods inflation slowed to 2.7%, from 3.0% in October.

“Average fuel prices lifted by 0.9% compared to the month before but were 13.6% lower than in November 2023. Food and non-alcoholic beverages inflation was 2.3%, down from 3.6% in October. Monthly deflation of 0.4% was driven by vegetables and cereals, as well as dairy and eggs. Negative contributions from 60% of the food and drinks basket were mitigated by fruit inflation.”

Mano says they see inflation remaining around 3.0% in December, with monthly pressure driven by higher fuel prices and potentially core inflation with a new survey outcome on housing costs, but food inflation could remain subdued.

“We expect headline inflation to continue increasing steadily into 2025, but we do not expect it to surpass 4.0% until the turn of the year. Risks to the outlook include a more robust normalisation in services inflation, starting with medical insurance in February and followed by other services that would be supported by improving domestic demand.”

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Trade restrictions and geopolitical tensions could be a problem

Mano warns that growing trade restrictions and geopolitical tensions would also drive reflationary pressure across various parts of the globe and keep monetary policy tighter than currently anticipated.

“This risk-laden environment and monetary policy recalibration in countries such as the US would weigh on emerging market currencies. A weaker rand will have implications for imported and goods inflation.”

The risk of higher global inflation and tighter financial conditions will not only have implications for the outlook on South Africa’s inflation but will filter through to monetary policy, according to Mano.

“The South African Reserve Bank (Sarb) is expected to cut interest rates by 25 basis points each meeting until May 2025. While risks may not unfold quickly enough to challenge this view, they will keep the Monetary Policy Committee (MPC) cautious. An accelerated unfolding of these risks may result in the cutting cycle ending prematurely.”

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Food and fuel prices will drive inflation higher in 2025

Johannes Khosa and Nicky Weimar, economists at the Nedbank Group Economic Unit, also expect inflation to drift higher into 2025, lifted by food and fuel prices.

“Food inflation will increase as the high base reverses and the impact of the earlier dry weather filters through. Global disinflation will also slow down.

“However, improved domestic operating conditions thanks to a stable electricity supply and further efficiency gains in logistics should help contain input costs and operating expenses, which, together with the predictions of higher rainfall, will partly mitigate the upside.”

Khosa and Weimar expect that global oil prices will likely increase slightly as global demand improves and OPEC extends production cuts. “The ongoing conflicts in the Middle East also still threaten oil prices.

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US economic policies and electricity tariffs

“Meanwhile, the stronger US dollar will likely weigh on the rand and other emerging market currencies. The dollar will benefit from the expected change in US economic policies under Donald Trump’s administration, which could lead to sticky global inflation and raise the floor on interest rate cuts.”

On the domestic front, they warn that the threat of electricity tariffs and other administered prices increasing more than expected and wages outpacing productivity could also exert pressure.

“Despite these risks, inflation is expected to hover around the Sarb’s 4.5% target for much of next year and average 4% in 2025. The economic recovery is also unlikely to lead to significant demand pressure on prices. Consequently, we expect the Sarb to cut interest rates by 75 basis points in 2025.”