South Africa: CPI inflation edges up in March

In a surprising turn of events, South Africa's consumer price inflation edged up in March, defying expectations of a decrease. The consensus among economists was for a fall in inflation numbers, but to the dismay of many, the figures ticked higher, reaching 7.1 per cent last month. This marks the second consecutive rise and is well above most economist predictions. Isaah Mhlanga, Head of Research at Rand Merchant Bank, discussed the unexpected inflation trends and the potential impact on the country's economy in an interview with CNBC Africa. One of the major contributors to the inflation uptick was food price inflation, which has remained uncertain. Factors such as load shedding and rising costs for producers, including farmers and food manufacturers, have fueled the inflationary pressure. The impact of transport costs has also played a role, although to a lesser extent. Mhlanga highlighted that load shedding continues to be a significant source of uncertainty in the inflation trajectory. Looking ahead, he anticipates that food price inflation will peak in April before gradually tapering off starting from May. However, the unpredictability of electricity costs in the food manufacturing value chain poses a continued risk of pushing inflation upwards. Mhlanga explained that there is typically a lag of three to nine months between producer price inflation (PPI) for food and the ultimate consumer prices. With PPI already reaching a peak, he expects consumer food prices to follow suit. Despite the challenges posed by rising electricity costs, he remains optimistic that other cost drivers coming into play in May could potentially lead to lower inflation readings. While headline inflation has risen, the core inflation rate, which excludes volatile components such as food and energy, has stayed stable at 5.2 per cent, offering some reassurance about the underlying inflationary pressures. When questioned about the implications of the latest CPI report on interest rates, Mhlanga maintained that the stable core inflation rate has not altered their expectations for now. He emphasized the importance of looking beyond single data points and focusing on broader trends to gauge the direction of interest rates. Despite the revision of South Africa's growth forecast to a meager 0.2 per cent by the International Monetary Fund (IMF), Mhlanga argued that the lack of growth in the economy diminishes the demand for inflation. Given the current economic stagnation and the anticipated decline in food price inflation, he advised a cautious approach to interest rate adjustments to avoid tipping the economy into a recession. In the scenario where the South African Reserve Bank (SARB) opts for more aggressive interest rate hikes than the expected 25 basis points, Mhlanga warned that the economy, which is already teetering on the brink of recession, could be pushed further into negative growth territory. With conflicting priorities of high inflation and low growth, the SARB faces a challenging balancing act in its monetary policy decisions. Mhlanga stressed the importance of considering the delicate economic conditions before implementing drastic measures that could potentially worsen the situation.