Investec Chief Economist Annabel Bishop says inflation should continue to decline – but warned that food prices could start to climb again.

Bishop said that Consumer Price Inflation (CPI) in July 2022 was the peak of the current inflation cycle at 7.8%, creating a high base for South Africa’s July 2023’s CPI to be calculated.

She added that the electricity tariff increase taking effect in July – 18.49% for municipalities – will contribute the largest share to the headline inflation rate, whilst petrol prices only saw a slight decline of 17c/litre.

Insurance costs surveyed for buildings and household contents, food prices and several areas are also likely to affect July’s inflation data.

“This results in the possibility of the inflation rate ranging between 4.5% y/y and 5.0% y/y, although food price inflation has seen some moderation this year, from 14.0% y/y in March to 11.0% y/y in June, with South Africa experiencing favourable weather conditions,” she said.

Warning

That said, she noted that the El Nino Period will likely put pressure on agricultural production in the future.

El Nino is an irregular weather pattern that occurs every two to seven years, which results in drier conditions in South Africa.

Although Bishop noted that South Africa is coming off a long La Nina (above average) rainfall period, which has led to substantially more soil moisture, a possible decline in summer crop production in the country could affect food prices.

“In combination with the effects of climate change, which have been very marked this year in the northern hemisphere summer, South Africa’s summer crop production does hold some uncertainty and could see stickiness in food price inflation,” she said.

She added that the high price inflation of 2022 created base effects which led to a significant decline or disinflation. Still, these base effects are expected to run down from August – especially in Q4 2023.  

“While CPI inflation is expected to average around 4.5% y/y in 2024, there are risks, particularly from food price inflation, with retailers seeing margin squeeze on the costs of load shedding, while climate change is escalating globally and locally.”

Cautious optimism

David Rees, Senior Emerging Markets Economist at Schroders, also said that drought-lie conditions in South Africa could severely impact the local and global food supply chain, which would push prices higher.

“While leading indicators imply that food inflation in South Africa should still fall significantly in the near term, the effects of El Nino could cause it to rebound in 2024,” Rees said.

Wandile Sihlobo, the Chief Economist of the Agricultural Business Chamber of South Africa, also said that the El Nino period could impact agricultural production but stressed that it won’t be as harsh as the El Nino seen in 2015/16.

“We are coming from four consecutive rainy seasons that have significantly improved soil moisture. Hence, we remain positive that the upcoming season will likely be decent, although down from the current large harvest,” he said.

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