After a prolonged period of high inflation rates across the globe, major price indices are finally showing signs of peaking. This global trend is also reflected in South Africa's current economic landscape. Annabel Bishop, Chief Economist at Investec believes falling inflation rates, known as disinflation, indicate a deceleration in the rate of price increases. She was speaking on the fortnightly podcast No Ordinary Wednesday on Investec Focus Radio.

Bishop says: “This global and domestic trend is expected to continue, resulting in a boost to financial market sentiment. South Africa experienced a peak in inflation in the middle of the previous year, followed by a slight decrease. However, at the beginning of the current year, inflation surged again due to the substantial weakness of the South African Rand, which influenced fuel prices and the translation effect on food prices.” Despite these fluctuations, Bishop predicts a downward trend in inflation going forward, with expectations of it returning to the targeted range next year.

She explains that current decline in inflation is driven by what she terms base effects. “A year ago, inflation was rising due to increased commodity prices. However, as commodity prices have significantly decreased year-on-year, this creates a base effect that contributes to a substantial fall in inflation. Additionally, South Africa's low demand and the base effect of the previous year's rising inflation further support the expectation of declining inflation rates. Although unexpected variations in monthly inflation rates may occur, the overall trend is likely to continue as disinflation.”

Sticky food price inflation

Despite a notable decrease in global food prices, South Africa has however experienced sticky food price inflation at the consumer level. Bishop identifies two key factors contributing to this phenomenon. First, the issue of load shedding, which leads to higher self-generation costs for retailers, resulting in increased expenses related to refrigeration and freezing of food. Second, the weakness of the Rand plays a significant role.

She says a substantial depreciation of the Rand against the US dollar, even when coupled with a drop in global food prices, can still cause a rise in domestic food prices.

SA won't benefit from a fuel price decrease

“Negative sentiment towards South Africa, influenced by a range of factors including its relationship with Russia, can impact the Rand and subsequently affect inflation rates. The recovery of the Rand and the resolution of these issues are expected to alleviate the pressure on food prices in the future.”

Additionally notes Bishop the recent moderation of US consumer inflation has been attributed, in part, to lower fuel prices. However, South Africa's situation is different due to its heavy reliance on imports for petroleum products.

“The weakening of the Rand makes US dollars, required for purchasing oil and petroleum products, more expensive. The fluctuation in fuel prices in South Africa depends on the exchange rate between the US dollar and the Rand, as well as the actual oil prices. As South Africa imports significant amounts of diesel and petrol, the weakness of the Rand has prevented the country from benefiting fully from potential fuel price cuts. Therefore, future developments in the relationship between South Africa and Russia, particularly considering the upcoming BRICS Summit, will impact the Rand, fuel prices, and overall inflation.”

Bishop says close monitoring of all these factors and implementing measures to address underlying challenges will be crucial for South Africa to achieve stable and sustainable economic growth.