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<p><strong>By: Reza Hendrickse, Portfolio Manager at PPS Investments</strong></p>

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<p>Consumer price inflation increased to 3.3% year-on-year as at the end of October 2020, slightly higher than September but remains at the lower end of the South African Reserve Bank’s target band. Apart from Transport, all of the groups measured added to inflation, however the main contributors in October were once again “Food and non-alcoholic beverages”, “Housing and utilities”, and “Miscellaneous goods and services”, given their larger weighting in the CPI basket.</p>

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<p>Food, Housing and Utilities and Transport make up over half of the CPI basket, and among these three groups, food has seen the largest increase in price over the past year, with all the underlying categories seeing above-CPI rates of increase. Given that this represents a higher proportion of spend for lower income earners, inflation will have been more pronounced for this segment of the population. The Miscellaneous Goods and Services category, which includes Insurance, Financial Services, Personal Care and other goods and services, represents another core component of the CPI basket, which has experienced price increases of roughly twice the CPI number. In the Housing category, although prices remained constant this month, Water and Electricity have been the main drivers of higher prices over the past year.</p>

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<p>Inflation has fallen in recent years, but is expected to rise moderately going forward. The Monetary Policy Committee of the South African Reserve Bank (SARB) expects inflation to average 3.9% in 2021 and 4.4% in 2022, both still below the mid-point of the target band. The lower oil price and stronger rand in recent months have contributed to lower inflation, but weak economic growth has also kept a lid on inflationary pressures. Growth is expected to have rebounded significantly in the third quarter, but the economy is still forecast to have contracted by 8% this year, while we could look forward to 3.5% growth next year.</p>

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