Inflation in South Africa appears to have peaked in the current cycle, as favorable food prices offset increased pressure from rising oil prices. The Consumer Price Index (CPI) slowed to 4.3% in July compared to 5% in June, marking the first slowdown in five months. This decrease was attributed to softer fuel price growth and lower domestic inflation in the food sector.
Annabel Bishop, Chief Economist at Investec, noted that inflation has likely reached its maximum, with agricultural and food prices providing an important buffer. Data from Statistics South Africa showed that producer price inflation in agriculture fell by 10.3% year-on-year in June, and grain and other crop prices dropped by 20.3%. Bishop explained this improvement by better weather conditions and abundant harvests, which also helped keep animal and meat prices at a relatively moderate level.
This has so far limited the impact of rising oil prices on food costs. Bishop emphasized that despite Brent crude returning to around $90 per barrel due to escalating conflict in the Middle East, the increase in oil prices has not yet been reflected in South Africa's food inflation. She added that without slowing food price growth, CPI would be at 5%.
El Niño Threat
Climate services forecast an intensification of the El Niño weather pattern to strong or very strong levels, raising concerns about drought and flooding in several regions. Nevertheless, South Africa enters this period with relatively high soil moisture and reservoir levels, as well as good yields of grains and oilseeds. This puts the country in a more favorable position than before the last very strong El Niño in 2015/16, according to Bishop.
Fruits and vegetables are typically grown using irrigation, and abundant field harvests have provided significant feed reserves for livestock. The current El Niño is expected to last from August until February or March of next year. Bishop also noted that "agricultural conditions overall were particularly good for South Africa this year and contributed to an improved economic growth outlook," indicating that Investec expects economic growth of 1.3% this year.
Oil Risks
Another significant factor is oil. Rising Brent crude prices are due to renewed concerns over supply through the Strait of Hormuz amid heightened tensions in the Middle East. This means that the positive contribution of fuel to July inflation figures may become less significant in the coming months.
Bianca Botes, Managing Director at Citadel Global, warned that the return of a geopolitical premium to energy markets could lead to increased transport costs and disrupt the disinflation process. She believes that resolving supply chain bottlenecks could take months, making the maintenance of energy price pressure important for monetary policy.
Despite the drop in headline inflation, core inflation, excluding food and energy, slightly rose to 4.2% in July, indicating that fundamental price pressures have not completely eased. Botes noted that "this hidden resilience supports the South African Reserve Bank's decision to raise the repo rate to 7%. Governor Lesetji Kganyago's strategy to anchor inflation expectations ahead of potential pipeline pressures seems to be helping."