SA inflation reaches 30-month high in May

South African inflation has reached a 30-month high in May, coming in at 5.2%, up from 4.4% in April. This increase was not surprising, as it was in line with economic forecasts and was expected due to the low base seen in the same period last year. Arthur Kamp, Chief Economist at Sanlam Investments, noted that the inflation surge was mainly driven by specific factors such as fruit prices and a significant year-on-year increase in petrol prices by 41.8%. Additionally, vehicle prices globally have been on the rise due to shortages of semiconductors, putting pressure on production. These components, particularly transport and food, accounted for the majority of the inflation increase. However, in other sectors like durable goods, there was either deflation or very low year-on-year increases. Services inflation also remained low at 2.7%, with some potential reversal expected as the year progresses. Despite these price pressures, Kamp stated that the overall outlook for inflation remains stable, with expectations for a moderate decrease to around 4.8% by the end of this year, averaging at 4.2%. The forecast for next year is 4.4%, aligning closely with the Reserve Bank's projections. Kamp highlighted several factors contributing to the benign inflation outlook, including a negative output gap, low unit labor cost growth, stable currency performance, and well-anchored inflation expectations below the target midpoint. Although there are risks, such as potential spikes in oil prices, Kamp believes that the underlying forces will help to maintain inflation close to the Reserve Bank's target range. The economist also addressed concerns about rising oil prices, acknowledging that a significant increase to $100 per barrel could impact headline inflation but could also curb domestic demand. While the Reserve Bank has noted upside inflation risks, Kamp remains optimistic about inflation staying within the targeted range. Looking at the output gap, Kamp estimates a negative gap of around 3% this year, moderating to around 2% next year and potentially remaining slightly negative in 2023. The economy is still in recovery mode and has not fully returned to pre-pandemic levels, exerting downward pressure on prices. Regarding the transient nature of inflation, Kamp sees the current uptick as temporary and influenced by global factors such as supply chain disruptions and slow services recovery. As vaccines roll out and services resume, Kamp expects a normalization in prices. While he acknowledges the possibility of further inflation fluctuations, he views the overall trend as transitory over a year. Despite negative output gaps and subdued inflation, Kamp anticipates that interest rates could start rising late this year or in 2022. He pointed out that the Reserve Bank's quarterly projection model suggests a need for interest rate hikes to align with medium-term inflation targets. Kamp emphasized the importance of monitoring US monetary policy, as any shifts could impact global rate expectations. While Reuters had initially forecasted continued accommodative policies for the year, Kamp's insights hint at a potential earlier tightening, influenced by global economic developments.