Momentum Investments have released their report based on ‘Marginal uptick in headline inflation to 4.8% y/y in August’ prepared by the Momentum Investments Macro Research Team, Sanisha Packirisamy, Economist at Momentum Investments and/or Tshiamo Masike, Economic Analyst at Momentum Investments and/or Herman van Papendorp, Head of Investment Research & Asset Allocation at Momentum Investments.

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Highlights

• The Consumer Price Index (CPI), published by Statistics South Africa (Stats SA), ticked up to 4.8% year-on-year (y/y) in August 2023, following four consecutive decreases that led to inflation falling to 4.7% y/y in July.
• The headline inflation outcome was on par with the Reuters median consensus while core inflation rose by slightly more than anticipated (4.8% y/y against the expectation of 4.7% y/y).
• The biggest driver behind the increase in CPI was the rate of transport deflation moderating to negative 0.8% y/y in August from negative 2.6% y/y in July, reflecting the diminishing high base effects of fuel inflation.
• The continuation of subsiding base effects, the large fuel hike in September (R1.71/l for both grades of petrol and R2.84/l for diesel (0.05%)) and forecasts of higher international oil prices will likely place further upside pressure on transport inflation, leading to an acceleration in headline inflation, in the very near term.
• Data from the Central Energy Fund (CEF) suggests that large fuel hikes can be expected in October. The estimated under-recovery on 18 September was recorded at R1.24/l for petrol (95) and R1.97/l for diesel (0.05%).
• The price of Brent crude oil increased to an average of US$86.2/bbl in August and breached the US$90/bbl level on 5 September 2023. The United States (US) Energy Information Administration (EIA) estimates Brent crude oil to average US$92/bbl in September, increase to US$93/bbl in October and November and moderate to below US$90/bbl from April 2024.
• Food inflation softened to single digits (8.2% y/y) in August, the lowest number since June 2022. The South African Reserve Bank (SARB) expects food inflation to decelerate for at least another six months on the back of good crops and cattle restocking.
• Risks to food inflation are relatively muted (including, slightly lower levels of cattle slaughtering in the first seven months of 2023 relative to a year ago and the reintroduction of poultry tariffs). On a positive note, the nominal United Nations (UN) Food and Agriculture Organisation (FAO) Food Price Index dropped by 2.1% month-on-month (m/m) in August 2023, reversing the 1.1% m/m increase in July; local farmers are increasingly investing in alternative sources of energy which will benefit production and there are efforts underway to revive the Black Sea Grain Initiative which expired in July 2023.
• Households in expenditure deciles one to three (annual expenditure of less than R48 673) are expected to benefit from the continued deceleration in food inflation while the large fuel hikes place upward pressure on households in the upper deciles (annual expenditure of more than R143 175).
• Considering inflation remained well within the target range in August, we maintain our view of another repo rate pause at the upcoming September 2023 interest-rate setting meeting, but the tone will likely be hawkish to reflect upward pressure on transport inflation, concerns over the volatility of the currency, higher administered prices, loadshedding and the risk of El Niño.
• We expect the SARB to maintain a restrictive stance on monetary policy in light of fiscal dominance fears and persistent upside risks to the inflation profile. As such, we only expect the first cut in interest rates in the second quarter of 2024.