Petrol prices shot up by R3.00 per litre from January to May 2024, causing a concomitant spike in inflation over the period.
However, with another 66 cents per litre cut expected for September, the total price reduction since June will total R3.14, giving South African motorists a small but positive swing in prices of around 14 cents per litre since the start of the year.According to Investec chief economist Annabel Bishop, this pendulum swing in fuel prices will have a positive impact on inflation in the coming months – though the small size of the swing shows why inflation has been taking longer to cool.
Bishop noted that South Africa’s CPI inflation rate started the year at 5.3% y/y, then jumped up in February to 5.6% y/y, before returning to 5.3% y/y, as the petrol price climbed by R3.00/litre from February to May. In June CPI inflation had slipped to 5.1% y/y.
With petrol prices having been cut each month from June so far this year, the targeted measure of inflation (CPI) is expected to drop lower, to under 5.0% y/y in July, and then closer to 4.5% y/y over the rest of the third quarter of the year. “Currently a 66c/litre petrol price cut is expected for South Africa at the start of nextmonth, after three cuts already having occurred from June, totalling R2.38/litre, while for the diesel price there have been five cuts, totalling R2.11/litre,” she said.
“Year to date, there has been little overall change in the fuel price, of only -14c/litre in total, which is one of the reasons why the CPI inflation rate has been slow to descend so far this year.” The more positive news is that oil prices—one of the biggest factors in determining the changes to petrol prices—have been subdued so far this month despite tensions in the Middle East. However, Bishop did warn that worsening tensions in the Middle East remain a substantial risk.Despite this, the outlook for the rest of 2024 is that there will be “little to no fuel price changes” in the fourth quarter of the year, she said. If the rand remains stable, inflation could run between 4.0% y/y and 4.5% y/y in the quarter.
Investec Chief Economist, Annabel Bishop
Inflation expectations Stats SA will publish the latest CPI figures next week (21 August) for July 2024.
Economists at Nedbank expect headline inflation to ease further to 4.9% from 5.1% in June, primarily from transport costs, forecast to decline by 0.7% mom, reflecting the lower petrol prices, which dropped by 4.1% on falling global oil prices and a steady rand. “Many services are surveyed in July, including housing and utilities, building and household content insurance, and bus fares,” the group said.
While the relief from lower petrol prices will be evident, inflationary pressure is expected to show through from the ‘housing and utilities’ category, where pressure will mainly come from electricity tariffs.
Earlier this year, the National Energy Regulator of South Africa approved Eskom’s request for a 12.7% tariff increase. As a result, municipalities raised their electricity tariffs from July. On a monthly basis, consumer prices probably increased by about 0.7% in July, up from 0.1% in June, pushed up by seasonal price adjustments in some of the major categories, Nedbank said. Economists at the Bureau for Economic Research also anticipate a drop below 5% for inflation. However, adding some more positivity for consumers, the BER noted that core inflation is already holding steady at 4.5%, and headline CPI should moderate through the remainder of the year and reach the 4.5% midpoint target in September.This means that the expected interest rate cuts from the South African Reserve Bank are
feeling more certain—and could even be bigger than expected. “The lower inflation profile will give the SARB scope to cut its policy rate next month,” the BER said. ‘For now, our forecast is for a 25bps cut, but we can see a possibility of the SARB frontloading by 50bps in September. ”For this to happen, the rand exchange rate would need to ‘behave’—with higher probabilities of faster US Fed easing possibly helping in this regard—and the oil price should not spike up on a sustained basis, it said.