Inflation heats up as food prices hit 14-year high

Inflation accelerated to 7.1% year-on-year, bucking expectations that prices would have eased slightly in March.

According to data from Statistics South Africa, released on Wednesday, the monthly change in the consumer price index was 1% in March, the most significant monthly rise since July 2022, when inflation was expected  to have peaked.

The rise in inflation was again driven by elevated food price inflation, which recorded another increase, rising to 14% year-on-year in March — the highest reading in 14 years. Food prices were also the biggest driver of inflation in February, when they  rose by 13.6% year-on-year.

In March, food price inflation contributed 2.4 percentage points to the annual rate of 7.1%. The Thomson Reuters consensus had inflation easing slightly to about 6.9% year-on-year, down from 7% in February.

Despite pencilling in a slight cooling, economists were expecting inflation to remain elevated in March after two consecutive months of upside surprises and amid still sticky food prices.

Last month, the South African Reserve Bank’s monetary policy committee (MPC) revised the country’s 2023 headline inflation forecast significantly higher to 6% from 5.4%. 

The MPC’s new forecast took into account higher local food price inflation, which the committee revised up again, in part because of the lagged effect of the rand’s weaker exchange rate. The MPC now expects food price inflation to be 9.9% in 2023, up from the previous forecast of 7.3%.

The committee surprised analysts by hiking the repo rate, which affects the cost of borrowing, by a more-aggressive-than-expected 50 basis points. This was despite deteriorating economic conditions, which prompted the Reserve Bank to lower its 2023 growth forecast from 0.3% to 0.2%.

The MPC flagged the rand’s generally weaker position compared to a year ago, a factor that will keep inflation elevated. According to the MPC’s forecast, the implied starting point for the rand forecast is now R18.06 to the US dollar, compared with R17.32 at the time of the committee’s January meeting. 

The rand was buoyed last week as expectations of sharp interest rate hikes in the US continued to fade in the wake of turmoil in the banking sector. The rand is vulnerable to the Fed’s whims, which determine the dollar’s value. A weak rand signals higher inflation.

On Monday, the Bureau for Economic Research (BER) noted that recent speeches from several senior US Federal Reserve officials suggest that the time is approaching for a pause in the hiking cycle stateside. “Notwithstanding another robust US employment print in March, some of the recent US data releases have also been on the soft side. Combined with the tone from the latest Fed speeches, in response to this, some forecasters have reduced their US interest rate hike expectations.”

Last month the Fed hiked interest rates 25 basis points, with Fed chair Jerome Powell indicating that the fight to rein in inflation is far from over. Borrowing costs in the US are now higher than they have been since 2007.

The BER expects another 25 basis point Fed hike in May, followed by a lengthy pause. 

Investec chief economist Annabel Bishop notes that the direction of the rand going forward will depend heavily on the movement of the US dollar. A more definitive end to the US rate hike cycle would spur the rand to strengthen against the dollar, although a May Fed hike is still a possibility, she said.