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Inflation increases to 3.2% y-o-y in March

21 April 2021 Lullu Krugel, Chief Economist for PwC Strategy& Africa, and Dr Christie Viljoen, PwC Strategy& Economist

Transport costs rise as fuel prices increase

Statistics South Africa (Stats SA) reported on April 21 that consumer price inflation increased from 2.9% y-o-y in February to 3.2% y-o-y in March. The latest reading was slightly below expectations (3.3% y-o-y) as education inflation (surveyed annually in March) came in at 4.1% y-o-y – the lowest in three decades. Overall, March’s inflation report continued to reflect a very favourable retail price environment for South African consumers hard hit by an economic recession. Headline inflation is comfortably at the lower end of the South African Reserve Bank (SARB) target range of 3%-6%.

The biggest driver of higher y-o-y inflation in March was increased price pressure in the transport category: transport overall cost 1.2% y-o-y more. Petrol and diesel cost 65c and 56c, respectively, per litre more from March 3 as a result of higher international product prices. Stats SA also measured a 4.5% y-o-y increase in public transport costs during the month alongside more expensive fuel. In addition, the purchase price of vehicles climbed by 4.1% y-o-y in March – up from 3.8% y-o-y in February.

Figure 1: Headline inflation remains low near the bottom of the target range

Sources: Stats SA, SARB

The SARB Monetary Policy Committee (MPC) decided unanimously at their March 2021 meeting to keep interest rates on hold, following a three-percentage point cut in the repo rate last year. The central bank forecasts inflation to increase to an average of 4.9% y-o-y during the second quarter. While this outlook includes the impact of higher fuel and electricity prices, much of this increase from current levels is due to base effects. Inflation fell to a 15-year low during 2020Q2 during the strictest period of COVID-19 lockdown restrictions.

The MPC also warned in March that the next change in interest rates would be upward. With economic growth returning to South Africa and inflation returning to the mid-point of the SARB target range, policymakers need to consider the start to normalisation of monetary policy. While the SARB’s internal modelling suggests two 25 basis points increase in lending rates is needed in the second and fourth quarters of 2021, we believe a tightening of monetary policy is unlikely until early in 2022.

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