Sanisha Packirisamy, Economist at Momentum Investments and Herman van Papendorp, Head of Investment Research & Asset Allocation at Momentum Investments.

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Highlights:

• Headline inflation remained unchanged at 5.9% in April 2022. The figure was not a surprise to markets, coming in line with the Reuters consensus estimate.
• The monthly 0.6% uplift in headline inflation was predominantly underpinned by an increase in fuel prices, despite government intervention to offset a portion of the petrol price increase in the month to alleviate cash-strapped consumers.
• Despite widening supply and demand uncertainties, international oil prices have settled in a lower and narrower trading range. Nevertheless, a sharp sell-off in the local currency will add upward pressure to the expected fuel price increase for June 2022.
• Stretched maize and wheat futures prices and higher agricultural inflation at the producer price level are likely to filter through into local food inflation in the coming months at a retail level. Rising input costs, including agrochemicals and fertilizers, pose a threat to farmer costs especially given the higher fertilizer requirement for replanting following the extensive flood damage in KwaZulu-Natal.
• More than 38% of the weighted inflation basket experienced price increases in excess of 6% in April 2022. This was the highest proportion since May 2017. Inflation in the vehicles category breached 6% in the latest reading adding to the proportion of the basket experiencing price increases above 6%.
• Elevated international oil prices, the potential feedthrough into food prices and an accelerated hiking cycle globally are likely to support a further normalisation in local interest rates to curb inflation expectations. The recent sell-off in the local currency and the consequent fear of higher underlying inflation outcomes have shifted the consensus towards an expectation of a larger interest rate hike of 50 basis points at the upcoming May rate-setting meeting.
• In our view, the level of South African Reserve Bank (SARB) interest rate normalisation and the extent to which the interest rate hikes are frontloaded remain a function of the Monetary Policy Committee’s view on the degree to which current global inflation shocks are likely to feed through into underlying inflationary pressures in the economy by stoking higher wage growth and prompting more broad-based price increases outside of food and fuel.