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Encouraging drop in services inflation in April 2024

24 May 2024 Herman van Papendorp, Head of Investment Research & Asset Allocation, Sanisha Packirisamy, Economist and Tshiamo Masike, Economic Analyst at Momentum Investments
Herman van Papendorp

Herman van Papendorp

Sanisha Packirisamy

Sanisha Packirisamy

Tshiamo Masike

Tshiamo Masike

Consumer price inflation May 2024

Below is a short summary prepared by our macro research team on the latest figures for consumer price inflation:

• As reported by Statistics South Africa (Stats SA), the consumer price index (CPI or headline inflation) dropped slightly from 5.3% year-on-year (y/y) in March 2024 to 5.2% y/y in April 2024. Core inflation eased more meaningfully to 4.6% y/y in April from 4.9% y/y in March.
• From an average of 5.4% in the first quarter of 2024, the SA Reserve Bank (SARB) expects inflation to ease in the second quarter to 5.1% before bumping up slightly to 5.3% in the third quarter.
• High services inflation was previously flagged as a concern by the SARB. The moderation of services inflation to 4.6% y/y in April will likely be welcomed by the SARB but medical insurance inflation (the second largest item in the services basket) remains high at 10.3% y/y in April.
• Food and non-alcoholic beverages inflation (NAB) continued to trend downward for the fifth consecutive month to 4.7% y/y in April. The expected upward pressure on food inflation from the past El Niño season is not significant and is expected to be short-lived.
• The Crop Estimates Committee (CEC) upwardly revised its third summer crop production forecast for 2024 by 1% compared to its second production forecast.
• During May 2024, there were cases of foot-and-mouth disease reported in the Eastern Cape. Measures have been put in place to try and prevent the spread of the disease.
• Transport inflation edged up to 5.7% y/y in April, from 5.3% y/y in March. The rise in transport inflation was due to fuel inflation. Based on early data from the Central Energy Fund (CEF), we can expect fuel price cuts of around R0.84/l for petrol (95 ULP) and R0.90/l for diesel (0.05%) in June 2024 which will translate to downward inflationary pressure and provide relief for consumers.
• Both major determinants of domestic fuel prices (international oil prices and the exchange rate) have unfolded positively. The price of Brent crude oil has retreated from a monthly average of US$90/bbl in April to the lower US$80/bbl range in the first three weeks of May.
• The rand has strengthened from around R18.80/US$ in March and April to R18.41/US$ month-to-date (1 to 20 May). Investec notes that the rand’s strength in recent weeks could be attributed to subsiding political risk as more opinion poll results are being released.
• While the April inflation outcome is encouraging, we still expect the SARB to keep interest rates unchanged at 8.25% in May 2024. Considering that headline inflation is projected to continue to moderate, and that monetary policy is forward-looking in nature, we still see a possibility that the SARB may start cutting interest rates in the second half of 2024. We have, however, scaled back our expectation from 75 basis points worth of cuts in 2024 to 50 basis points, on persistent upside risks to inflation.

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