Outlook on SA inflation

A look at the forces determining price increases in South Africa for the rest of the year.

- Andrew Duvenage and Paul Marais

Consumer price inflation fell to 4.6% in July from 4.9% in June after a high of 5.2% in May, according to Stats SA. This is well within the Monetary Policy Committee’s inflation target range of between 3% and 6% per year, and only fractionally above its preference of a midpoint of the range at 4.5% per year.

The Reserve Bank tries to control South Africa’s inflation rate by setting interest rates to achieve its target range. The idea behind this is that interest rates are the price of money and the more expensive money is (based on higher interest rates), the less money will be chasing goods and services. When demand – expressed as the amount of money available – falls relative to supply, prices will rise slower or decline. The opposite is also deemed to be true: lower interest rates make money cheaper which increases demand relative to supply, pushing prices up.

Amidst high levels of uncertainty, low business confidence and sky high unemployment, it appears that inflation is the one thing we don’t need to be concerned about – for now. But for how long will this remain the case?

The three largest items in the CPI are housing and utilities, which has a weighting of 25%; food and non-alcoholic beverages at a weighting of 17%; and transport, which comes in at 17%. Combined, these three items account for almost 60% of the CPI basket.