CPI nears Sarb targets

South Africa's consumer inflation rose to 5.9% year on year in December from 5.5% the previous month, driven by ongoing pressures from rising food and fuel costs. Azzaya and Clanger, Chief Economist at Alexander Forbes, discussed the latest inflation data, highlighting the challenges facing the economy. Azzaya noted that the December inflation print of 5.9% exceeded their forecast of 5.7%, mainly attributed to higher goods inflation at 8.5% compared to 3.3% in services inflation. The economy continues to grapple with supply-side disruptions, leading to increased prices and inflation. The global environment, characterized by supply chain disruptions and geopolitical tensions, has further exacerbated the situation, impacting the production and shipping of goods globally. Although South Africa is on the brink of the 6% upper target band set by the Reserve Bank, Azzaya believes that inflation has not peaked yet, and supply-side disruptions are likely to persist for some time. Unlike the US, South Africa is not experiencing demand-pull inflation, with core inflation remaining closer to the lower end of the target band. Azzaya emphasized the need for a cautious approach to address the transition from supply-driven to demand-driven inflation. The oil price volatility, influenced by geopolitical tensions and climate change issues, has also contributed to the inflationary pressures. The increase in energy prices, coupled with a weaker rand due to expected US Federal Reserve rate hikes, is expected to keep fuel and transportation costs elevated. This, in addition to rising food prices due to weather-related challenges and global supply chain issues, is likely to push inflation higher in the coming months. Azzaya underscored the concerns regarding the impact of heavy rains on the agricultural sector and food prices. The combination of local rainfall disruptions and global food production challenges is expected to result in continued high food price inflation, further driving up headline inflation numbers. Despite these challenges, Azzaya remains hopeful that demand-side inflation will remain subdued, providing some relief in the sub-target band. However, uncertainties loom, requiring a proactive and strategic response to manage inflationary pressures.