South African inflation increased for the third month in a row, owing to rising underlying price pressures.
The headline consumer-price index increased 7.8% year on year, compared to 7.4% in June, according to a statement posted on Statistics South Africa’s website on Wednesday. This matched the median estimate of 14 economists. It is still at levels last seen during the global financial crisis, and it is now the fastest inflation since Lesetja Kganyago took over as central bank governor.
Core inflation, which excludes food, nonalcoholic beverages, fuel, and electricity, accelerated to 4.6%, exceeding the central bank’s target range of 3% to 6% for the first time in more than four years. The monetary policy committee of the Reserve Bank prefers to keep inflation expectations close to 4.5%.
South Africa’s benchmark bonds rose following the announcement, with 10-year yields falling to their lowest level in two weeks. The rand remained stable.
Kganyago has told lawmakers that headline inflation may be nearing a trough, but rising underlying price pressures may force the MPC to maintain its aggressive interest-rate hike cycle.
Policymakers raised borrowing costs for the first time in nearly two decades in July, signaling a faster pace of increases through next year. Since November, the central bank has raised interest rates by a total of 200 basis points.
The repurchase rate is currently at 5.5%, and the implied policy rate path of the central bank’s quarterly projection model, which the MPC uses as a guide, predicts it will be at 5.61% by the end of the year. Markets, on the other hand, are pricing in a 65 basis point increase next month and a total of 125 basis points for the rest of the year.
South Africa Currency Fall
Food and fuel costs are driving up headline consumer prices. Though international oil prices and global food cost pressures appear to be easing, the domestic inflation outlook is still clouded by a South African rand that has lost more than 6% against the US dollar this year and high, precedent-setting wage increases agreed to by companies such as Eskom Holdings SOC Ltd.
In an economy still reeling from several Covid-19 lockdowns and deadly riots in 2021, rising inflation, continued monetary policy tightening, and elevated unemployment pose a threat to social stability. They also threaten to put additional strain on household consumption spending, which accounts for roughly two-thirds of GDP.
“Within the consumer segment, we’ve definitely started to see pressure begin to emerge at the lower living standard measure levels.” Mike Brown, chief executive officer of Nedbank Group Ltd., said in an interview earlier this month. The bank targets more affluent clients.
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