Only three categories of inflation printed above 6% in October

Sanisha Packirisamy, Economist at Momentum Investments and Herman van Papendorp, Head of Investment Research & Asset Allocation at Momentum Investments provide research notes on the three categories of inflation printed above 6% in October.


  • Headline inflation remained unchanged at 5% in October 2021. Financial markets were steady following the release, given that the figure was broadly in line with the Bloomberg consensus forecast of 5.1%. 
  • The price increases in food/non-alcoholic beverages and transport were largely responsible for the monthly increase in the consumer price index (CPI) of 0.2%.
  • Fuel inflation rose 23.1% year-on-year (y/y), after factoring in a 1c/l dip in 95 petrol (inland) but is expected to rise into year-end on a weaker local currency and higher international oil prices, amid a global energy crunch.
  • Core inflation steadied at 3.2% for the same period (in line with the Bloomberg consensus), reflecting moderate domestic demand, past currency strength, low services inflation and modest wage pressures. 
  • The dispersion of inflation in the consumer basket remained low in the October inflation release. Only three out of the 28 inflation categories experienced inflation in excess of 6%. These categories included food, private transport and electricity.
  • Although higher fuel costs should drive inflation higher in the near term, services constitute around half of South Africa’s (SA) inflation basket and lower price pressures in this component of the basket (including medical aid tariffs and rental inflation) will likely continue to provide an anchor for headline inflation in 2022.
  • In our view, contained inflation and longer-dated inflation expectations (which remain close to the midpoint of the target band) could allow the SA Reserve Bank (SARB) to stave off rate hikes until the first quarter of 2022. With financial markets having already partly priced in tapering by the United States (US) Federal Reserve (Fed), it is less likely that emerging market (EM) assets will have a similar experience akin to the 2013 Taper Tantrum.
  • We believe the medium-term profile for inflation should afford the SARB additional time before commencing the interest rate normalisation cycle and adhere to our view for the first interest rate hike to take place in the first quarter of 2022. Nevertheless, we acknowledge that risks to an earlier (November 2021) hike have increased. In light of higher short-term inflation pressures resulting from food and fuel, the SARB may opt to act pre-emptively to keep inflation expectations anchored.

SA inflation modest against a backdrop of rising global inflation fears

SA headline inflation steadied at 5% in October 2021, with the monthly 0.2% increase driven by food and non-alcoholic beverages (vegetables and cold beverages in particular) and transport (specifically motor vehicles). The rise in the CPI relative to a year ago was broadly in line with the Bloomberg consensus forecast of 5.1%.

Meanwhile, inflation pressures are mounting in the global setting. Energy and food prices have, in large part, driven the surge in headline inflation for the developed market (DM) and EM aggregates to above the mid-points of their inflation targets ( See chart 1). Meanwhile, core inflation measures have risen at a softer pace for the majority of these economies.

According to the Bank for International Settlements (BIS), bottlenecks in the supply of commodities and freight transport have led to an increase in the volatility of prices and have caused delays in deliveries. The BIS notes that the “bullwhip effect” has aggravated what started out as pandemic related supply-side disruptions. Supply chain participants attempted to build buffers in production networks that were already lean, exacerbating supply shortages. Bottlenecks in upstream industries ( which supply inputs to many other industries) have driven price pressures across global value chains.

Record low energy inventories have sent energy prices soaring while sudden increases in the demand fir manufactured goods translated into bottlenecks and higher goods inflation, given the relatively low supply elasticity of certain goods which are capital intensive and require a longer lead time to expand production capacity. The BIS further notes the prioritisation of efficient supply chains over resilient ones has increased the complexity of supply chains and amplified the mismatch between demand and supply.

As the demand for goods (lower) and services ( higher) normalise and as additional capacity comes onstream, supply chain disruptions are expected to abate. As long as longer-run inflation expectations remain well anchored and weak trade unionisation to moderate in the matter half of 2022.

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