By Koketso Mano, FNB Senior Economist
Headline inflation lifted to 3.5% y/y in July, up from 3.0% in June. The print was slightly below our 3.6% forecast but in line with the consensus expectation. Monthly pressure was 0.9%, mainly driven by electricity and core items.
Core inflation was 0.4% m/m and 3.0% y/y, up from 2.9% previously. Monthly pressure was led by water and other housing services. Services inflation recorded 0.4% m/m, and 3.6% y/y. Core goods inflation was 0.4% m/m and 1.6% y/y.
Electricity inflation was 10.4% m/m and 10.6% y/y. Overall, utilities inflation was 7.6% m/m and 8.0% y/y – outpacing headline inflation. Average fuel prices increased by 2.6% m/m but were still 5.5% lower than in July 2024. Food and non-alcoholic beverages (NAB) inflation was 5.7% y/y, up from 5.1% previously. Monthly inflation of 0.6% was mainly from meat inflation and was mitigated by monthly deflation in oils and fresh produce.
Outlook
With an update of today’s data, we see headline inflation remaining flat in August. Monthly pressure on food could continue to slow while average fuel prices should detract from monthly headline pressures. This will be supported by muted momentum in underlying inflation. Therefore, we should see contained monthly pressure on the headline figure. That said, the fading of positive base effects will drive a further lift in annual inflation over the coming months.
Headline inflation should remain below the midpoint of the target range. Relatively soft inflation will be supported by weak oil prices, a stronger rand, and a slow recovery in economic activity. The rise in utility costs, which have tended to surpass headline inflation in history, will continue to place upward pressure on the inflation expectations of households and businesses.
Fundamentally, a failure by government to fully subscribe to a 3% inflation target will weaken the efficacy with which the South African Reserve Bank reduces the inflation target. As long as many of the costs that consumers face daily reman elevated, the Monetary Policy Committee’s (MPC) reliance on responsive inflation expectations supporting the journey to lower inflation will be at risk.
Instead, monetary policy may have to restrict activity more than desired to compensate for pricing behaviour that does not quickly adjust to this new objective. Today’s outcome highlights the impact of these input costs in overall inflation dynamics. Had it not been for the rise in utility costs, headline inflation would have been 3.1%. The August inflation print is scheduled for release on 17 September. There are no major periodical surveys conducted in August, but any remaining utility increases (7.27% weight in CPI) may come through in the print.
