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Frederick Mitchell, Chief Economist | Aluma Capital (Pty) Ltd
Frederick Mitchell
October 23, 2024

CPI falling below forecasts

Inflation slowed markedly from 4.4% in August 2024 to 3.8% in September, slowing more aggressively than market expectations of 4.1%. Month-on-month growth was minimal at just 0.1%.

The rise in inflation for September was driven by:

  • Housing and utilities (including electricity and other administered prices), which increased by another 4.8%, contributing 1.1 percentage points to inflation.
  • Miscellaneous goods and services, which rose 6.9%, adding 1.0 percentage point.
  • Food and non-alcoholic beverages, which increased by 4.7% year-on-year, contributing another 0.9 percentage points.
  • Alcoholic beverages and tobacco, which recorded an increase of 4.7% year-on-year, contributing another 0.3 percentage points.

The categories that experienced increases are not surprising, as they primarily contribute to household budgets being in the “red.” These rising costs further erode purchasing power, albeit at a slower rate. Ongoing inflationary pressures heighten affordability concerns, squeezing household incomes and prompting increased reliance on credit to maintain current lifestyles. This elevated credit burden makes already indebted consumers more vulnerable to interest rate hikes and rising product prices.

It’s crucial to note that these price increases are not driven by domestic demand but rather external factors, including electricity supply constraints, costs associated with alternative power generation, and rising import prices, which are passed on to consumers through the market.

Although inflation continues to rise, it is doing so at a slower pace. Contributing factors to this moderation include:

  • The ongoing strength of the rand, which has remained around R17.50 against the U.S. dollar, as investor optimism has grown following the formation of the Government of National Unity (GNU) and early policy signals.
  • Reduced power supply constraints, leading to improved overall economic activity in South Africa during the second quarter of 2024.

Given the moderating inflation, better-than-expected economic growth, improved electricity supply, and positive market sentiment, the Reserve Bank is likely to lower interest rates further in November 2024. This reduction may slightly boost demand while alleviating pressure on household finances, potentially contributing to stronger economic growth in South Africa than initially anticipated for 2024 and going into 2025.

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