The Outlook For Inflation

What is driving higher local consumer prices?

- Andrew Duvenage

Last month, Statistics SA announced that annual inflation had accelerated to 4.4% in April, up from 3.2% in March, which is slightly higher than the anticipated 4.3%. The last time the consumer price index (CPI) reached similar highs was prior to the Covid-19 lockdown in February 2020 when it reached 4.6% before dropping to 3% in April 2020 and 2.1% in May 2020.

As expected, the South African Reserve Bank (SARB) elected to hold interest rates steady when they met in May given that the CPI figures remain below the mid-point of the inflation target (being 4.5%). Despite the slightly higher than expected inflation figure, the bond market barely blinked and the rand showed similarly little reaction.

When assessing inflation data figures, it is important to remember that they are retrospective or backward-looking. Looking ahead at the inflation rates that lie in our future is arguably a more valuable exercise, particularly if actual inflation turns out to be meaningfully higher or lower than markets had anticipated and the extent to which markets have priced this in.

The difference between the yields on SA government-issued nominal bonds and their duration-matched nominal bond counterparts provides some indication of what the market is currently pricing in.