Next Week’s CPI figures could pave the way for interest rate reductions

Next week’s Consumer Price Index (CPI) announcement by StatsSA will provide a crucial update on South Africa’s inflation trajectory.

Scheduled for 18 September, the CPI figures will offer insights into how inflation is changing in the context of recent trends, including declining fuel prices and a stabilising Rand. With inflation easing to 4.6% in July, down from 5.1% in June, the data could further solidify the case for interest rate cuts, as anticipated by many economists.

The CPI report will cover the price movements across a broad basket of goods and services, providing the SARB with key information just one day ahead of their Monetary Policy Committee (MPC) meeting. The relationship between the CPI and SARB’s interest rate policy cannot be overstated. According to Old Mutual, Group Chief Economist Johann Els, “If the CPI data shows inflation continuing its downward trend, as expected, the SARB may find itself with more flexibility to cut rates and support the economy without jeopardising its inflation-targeting mandate.”

One of the key factors to watch in the CPI report will be core inflation, which excludes volatile items such as food and energy. Core inflation is an important measure because it reflects underlying price pressures in the economy, beyond short-term fluctuations. In July, core inflation was recorded at 4.3%, and any further decline will likely reinforce expectations for an interest rate cut. Els has noted that “the underlying trend in price pressures has been particularly weak, with core inflation showing a steady decline over the past three months.”

Petrol prices have been a major driver of inflation in recent months. With prices declining by a cumulative R3.22 per liter since June, the CPI report will likely reflect lower transportation costs, which could push headline inflation further down. However, administered prices, such as electricity, continue to remain high and could put upward pressure on inflation. The balance between these factors will be critical in determining the final CPI figure for August.

The global context is also relevant here. The US Federal Reserve is expected to make a decision on its interest rates just before South Africa’s CPI data is released, with a rate cut widely anticipated. A more accommodative stance from the Fed could ease global financial conditions, support a stronger Rand, and contribute to lower inflation in South Africa over the coming months.

While the SARB has been cautious in its approach, maintaining high interest rates to manage inflation risks, the CPI data could signal that the time is ripe for rate cuts. The headline inflation rate is expected to fall further in August, possibly reaching around 4.5%, and some forecasts even suggest that inflation could drop below 4% in the coming months. This would mark a significant turnaround from the higher inflation figures seen earlier this year.

Next week’s CPI announcement will be an important moment for South Africa’s economic outlook. If the data confirms further easing in inflationary pressures, the SARB may have the justification it needs to start cutting interest rates, providing much-needed relief to consumers and businesses. The continued decline in inflation, particularly in core components, could set the stage for a more accommodative monetary policy through the end of 2024.