By: Sanisha Packirisamy, Chief Economist at Momentum Investments Group.

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So What?

We welcome the sharp drop in October’s headline inflation rate to below the lower bound of the inflation target range (3% to 6%). We have subsequently revised our inflation forecasts slightly lower to 4.6% in 2024 (previously 4.7%) and 4.2% in 2025 (previously 4.3%). Our expectations for a 25-basis point reduction in the repo rate in November’s interest rate-setting meeting and a terminal rate of 7.25% by the end of 2025 remain intact based on:

1. The expectation of a lower average for inflation in the fourth quarter of 2024.
2. The proximity to the neutral policy rate, which the SA Reserve Bank (SARB) intends to approach.
3. Still elevated inflation expectations.
4. Uncertainty over the impact of the two-pot retirement reform (with R35 billion withdrawn to date).
5. The re-election of Donald Trump in the US, which reintroduces global inflationary risks.

Consumer lens

Food inflation dropped to 2.8% y/y in October from 4.1% y/y in September.

• The average cost of a household food basket* in October was R5 348.70, up by 1% y/y (R51.07) and 1.8% m/m (R92.97).

Transport deflation into deeper negative territory at 5.3% y/y in October from negative 1.1% y/y in September

• Potential marginal petrol price (ULP 95) cut of R0.02/l in December and a price increase of R0.42/l in diesel (0.05%)**.

Headline inflation undershoot the lower bound of the inflation target

According to Stats SA data, headline inflation dropped by one percentage point to 2.8% y/y at the start of the third quarter (October) compared to September. This is the lowest level since June 2020 (during the COVID-19 pandemic). Core inflation moderated to 3.9% y/y in October from 4.1% y/y September. Both the headline and core inflation outcomes came in lower than the Reuters median consensus of 3.1% and 4.1%, respectively.

"The further decrease in transport prices (negative 5.3% y/y in October from negative 1.1% y/y in September), was the biggest driver behind the moderation in CPI."

Lower food and non-alcoholic beverages (NAB) inflation (3.6% y/y in October from 4.7% y/y in the previous month) also contributed to the benign headline inflation rate in October.

On a contribution basis, transport detracted 0.8 percentage points from the headline inflation rate in October. Food inflation and NAB remained the third biggest contributor with 0.7 percentage points but this was down from 0.9 percentage points in September. Apart from housing and utilises (including rental costs, maintenance and repairs, water and electricity) and miscellaneous goods and services (the two biggest contributors to inflation), the other seven inflation categories contributed 0.3 percentage points or less to the headline inflation rate in October pointing to broad- based low inflation pressures.

Goods inflation was also at its lowest level since June 2020 at 1.4% y/y in October (3.3% y/y in September). On the other hand, services inflation was unchanged at 4.4% y/y in October.

Transport deflation doing the heavy lifting to bring inflation lower

Transport inflation remained a big driver of disinflation for the fifth consecutive month in October, thanks to lower fuel prices. Specifically, fuel prices fell further into deflation at 19.1% y/y in October from negative 9% y/y in September. The large fuel price reductions in October (R1.14/l) contributed to the decline in fuel and transport inflation.

"The CEF announced a slight increase in fuel prices in November, with petrol (both grades) rising by R0.25/l and diesel (0.05%) by R0.21/l. These increases suggest that the detraction of fuel from headline inflation may be less significant thus reintroducing upward inflation pressure in November."

Early data from the CEF data (on 19 November) is pointing to a marginal reduction of R0.04/l in the petrol (ULP 95) price while diesel (0.05%) could increase by R0.40/l in December. The fuel price increase in November was due to higher oil prices of US$75.6/bbl in October compared to an average of US$74/bbl a month prior. Escalating conflict in the Middle East was behind this increase with oil prices escalating to a peak of US$80.93 in early October before easing again, as attention shifted to the sluggish oil demand and supply potential as noted by the International Energy Agency (IEA). Following the US elections, the IEA still expects the US to lead the non-OPEC+ supply growth in 2025 with total growth from five US producers expected to more than cover expected demand growth in 2024 and 2025.

"OPEC+ countries have pushed back unwinding voluntary oil cuts from commencing in December 2024 to January 2025. However, the IEA estimates that global supply will exceed demand even if the OPEC+ cuts remain in place."

This is a risk for OPEC+ because they could lose market share to US shale producers. OPEC+ countries could, therefore, pump oil at a lower-than-desired price level to prevent permanently losing market share. This will result in lower oil prices overall. J.P. Morgan highlighted that the biggest threat to US shale producers is low oil prices, but oil prices would need to be around US$50/bbl (under the current cost structure) for US oil production to decrease (see chart 1).

The rand remained stronger than a few months back at an average of R17.58/US$ in October (R17.6/US$ in September). This helped prevent a larger fuel price increase in November.

In October, administered price inflation decreased to negative 1.4% y/y from 2.1% y/y in September (see chart 2). When excluding fuel and paraffin, administered price inflation remained elevated at 7% y/y in October (unchanged for three consecutive months). This suggests that the decline in total administered price inflation is primarily influenced by changes in fuel prices. Chart 2 further illustrates that administered prices excluding fuel and paraffin have remained relatively stable, indicating that the fluctuations in total administered prices are largely attributable to fuel and paraffin costs (which make up 28.8% of administered prices).

International food prices at 18-month high

The Food and Agriculture Organisation’s Food Price Index (FPI) increased for the third consecutive month in October to the highest level since April 2023. The FPI was 5.5% y/y higher in October and 2% higher on a month-on-month basis. The sharp annual increase was due to dairy (21.9% y/y) and vegetable oil (17.8% y/y) (see chart 3). These increases were partially countered by lower cereals prices (negative 10.1% y/y) and sugar prices (negative 22.4% y/y).

"In its November 2024/25 food outlook, the FAO indicated that the production of wheat, maize, sugar and vegetable oil is expected to decrease, while increases are projected for diary, fisheries, meat and rice."

Domestically, the price of sunflower seed has shot up in recent months (see chart 4). This reflects higher international vegetable oil prices as well as lower domestic harvest estimates. Encouragingly, sunflower seed prices have not yet reached the 2023 peak.

" Domestic food inflation was 1.3 percentage points lower at 2.8% y/y in October (4.1% y/y in September). On the other hand, NAB inflation edged up to 9.8% y/y in October from 9.6% in September."

Food inflation cooled across eight of the nine food categories except for sugar, sweets and desserts. The price index for breads and cereals eased to around the mid-point of the inflation target range at 4.6% y/y in October from 5.4% y/y in September. Oils and fats remained in deflation (0.3%) and sunflower oil was one of the five food items that recorded the largest decrease over the past year (see chart 5). The trend witnessed in international vegetable oil prices and domestic sunflower seed prices will likely place upward on sunflower oil prices in the coming months.

The average inflation rate of the lowest expenditure deciles undershoots the 4.5% mid-point

The decrease in headline inflation is encouraging; however, this varies across different expenditure deciles. While households in the low expenditure deciles (one to three) still experience higher inflation rates compared to the other deciles, this group’s average inflation rate came down to 4.2% y/y in October 2024 from 5.1% y/y in September. This is thanks to the sharp decrease in food inflation, which is relevant for low-income earners as this constitutes the bulk of their spending. The top deciles (eight to 10) had a lower average inflation rate than headline inflation at 2.6% in October. These households are helped by lower transport and contained rental inflation.

Further reprieve in inflation further supports our view for a 25-basis point cut in November

Inflation moderating further below the lower bound of the inflation target range in October is welcomed and will likely intensify the debate around a bigger interest rate cut (e.g. 50 basis points).

"We maintain our view that the SARB will opt to reduce interest rates by 25 basis points in the November interest rate setting meeting."

Apart from risks flagged in the October inflation report (including medical insurance, rental inflation, wages and oil prices), we are leaning toward a 25-basis point cut as opposed to a 50-basis point cut as a result of:

1. A further expected moderation in inflation in the fourth quarter (the SARB expects inflation to ease to 3.6% in the fourth quarter (September estimate)
   from 4.3% in the third quarter).
2. The proximity to a neutral policy stance (the SARB’s intention is to cut to around 7% - 7.25%).
3. Still elevated inflation expectations.
4. Uncertainty around the impact of the two-pot
   retirement reform. The South African Revenue Service (SARS) has finalised 1.9 million applications with a gross value of R35 billion from 2.2 million applications so far (as at 18 November). It is not yet known how consumers have split their early pension withdrawals (consumption versus debt repayment).
5. Donald Trump’s re-election in the November US presidential elections. His proposed policies such as higher tariffs introduce global inflationary risks.

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* According to the Pietermaritzburg Household Affordability Index
The average food basket includes bread, frozen chicken portions, maize meal, sugar, beef, rice, cooking oil, potatoes, tinned pilchards, wors and other items.

** According to the Central Energy Fund (CEF)
The petrol cost of an average car (45 litres) was R958.5 in November, R11.25 more than in October.