The financial markets were jittery yesterday ahead of the release of consumer inflation data. which is expected to show that the cost of living in South Africa has accelerated further.
The rand danced around the R17-mark to the US dollar as investors adopted a wait-and-see approach to South Africa’s upcoming headline inflation figure.
Statistics South Africa (StatsSA) will today publish the consumer price index (CPI) for June amidst historic highs in the US and Europe which have propelled fears of the onset of a global recession.
Inflation data globally continues to show an uncomfortable rise due to rising energy and food costs, with the US printing a higher-than-expected inflation number of 9.1 percent last week.
South Africa's consumer inflation also quickened by more than expected to 6.5 percent year-on-year in May, breaching the SA Reserve Bank (SARB) target range for the first time since 2017 when the rate was 6.6 percent.
High fuel and food prices
Analysts are forecasting consumer prices to have accelerated further to more than 7 percent in June in South Africa, driven by rising fuel and food prices.
Sanlam Investments chief economist Arthur Kamp said the annual advance in headline CPI likely breached 7 percent in June, which was a long way from the SARB’s effective inflation target of 4.5 percent.
“High fuel prices increase production costs. Further, the shopping basket of poor South Africans is dominated by food and transport,” Kamp said.
“Not surprisingly, wage demands are increasing amidst rising inflation expectations, which should be reflected in upcoming inflation expectation surveys.
“These are the channels through which food and fuel price increases feed through into core inflation.”
Inflationary pressures are expected to remain elevated and continue forcing major central banks to continue or start tightening monetary policy further and raising interest rates to curb soaring prices.
The aggressive US Federal Reserve interest rate hikes and the tightening of global financial conditions have caused uncertainty over the global economic recovery.
The SARB, which estimates domestic inflation at 5.9 percent for 2022, is also expected to hike rates by 0.5 percent this week, but some economists are pushing the envelope.
BNP Paribas South Africa senior economist Jeff Schultz yesterday said he expected the SARB to raise the policy rate by 0.75 percent to 5.5 percent in a 3-2 split in favour of a faster frontloading by the Monetary Policy Committee (MPC).
Shultz said the persistence of non-core pressures alongside wage settlements creeping towards 6 percent year-to-date was likely to raise concerns.
“We believe that a majority on the MPC are likely to favour additional frontloading of 75 basis points as it looks to attempt to nip early signals of second-round inflation and expectations in the bud,” Shultz said.
“An assumption that strong base effects in food and fuel will bring CPI back towards the 4.5 percent target mid-point by end 2023 ; and more concern over the outlook for global and domestic growth could keep the MPC favouring 50 basis points.”
Still, recession and stagflation are looming on the horizon in the face of intensified load shedding and cooling commodity prices, as state-owned power utility Eskom remains the main threat to South Africa's economic growth.
Oxford Economics director for global macro research Ben May said the risk of global recession over the coming quarters had clearly grown, but a quick retreat in inflationary pressures was forecast in early 2023.
“But rather than the increasingly common belief that swathes of major economies are heading into recession, we think global growth will bounce back strongly in the third quarter,” he said.
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