Inflation will likely be higher for longer as rising food costs and higher medical aid prices filter through the data in the coming months.
Consumer price inflation and core inflation rose in February against market expectations and after easing for three consecutive months, Stats SA reported this week.
This higher number came amid price pressures stemming from medical aid and food inflation, in particular.
According to Momentum Investment economist Sanisha Packirisamy, these were the two main culprits in the figures, warning that medical inflation would also likely come into play for April’s numbers.
Core inflation grew to 5.2% YoY from 4.9% in February 2022 – marking the highest rate since February 2017.
According to Momentum, this is mainly due to higher services inflation – including medical aid inflation. In February, medical insurance shot up to 7.5% YoY, above the upper inflation target, from 4.8% YoY in January.
Packirisamy explained that this is because medical insurance has been low since February 2021, when medical schemes implemented small rate increases to help consumers cope with the impact of the Covid pandemic.
Various medical aids have now announced higher increases for 2023, which have led to higher medical aid inflation.
However, the three largest schemes (Discovery, Bonitas and Momentum Health) have deferred increases to April 2023. As such, medical insurance will likely rise again in April – leading to stubborn inflation levels in the future.
Stats SA typically only measures medical aid inflation twice a year (in February and April), so the April increases will likely feed through to the data for that month.
Short–dated inflation expectations
Due to the inflation risks that have materialised so far in 2023, such as a weaker domestic currency and higher food inflation, inflation expectations have been raised upwards, noted Momentum.
According to the Bureau for Economic Research (BER), inflation expectations for 2023 increased from an average of 6.1% in the 2022 fourth–quarter survey to 6.3% in the survey conducted in the first quarter of 2023.
Furthermore, the expectation for average inflation in 2024 also increased from 5.6% to 5.8%. These outcomes were higher than the SA Rwork and Bank’s (SARB) forecast of 5.4% for 2023 and 4.8% for 2024 communicated in the January 2023 MPC forecasts.
Longer–dated inflation expectations (five years) increased slightly from an average of 5.4% to 5.5% within the inflation target range.
The stable long-term expectation, although elevated, is encouraging because it signals that participants do not expect the prevailing risks to inflation to be persistent in the long run. This may also be interpreted as the SARB successfully communicating the intention of bringing inflation down toward the midpoint (4.5%), said Packirisamy.
Inflation
According to Statistics South Africa (Stats SA), consumer price inflation (CPI) rose to 7% year-on-year (YoY) in February, slightly up from 6.9% YoY in January and against market expectations of 6.9%.
Transport, housing and utilities, and miscellaneous goods and services all contributed to the rise in inflation, said Packirisamy.
Transport increased by 9.9% YoY, followed by miscellaneous goods and services (6.1%) and housing and utilities (4%) – contributing 1.4%, 1.0%, and 0.9% to headline CPI, respectively.
However, Packirisamy added that food inflation was the main driver behind heightened inflation – hampered by fuel prices, relentless load shedding, and a weaker rand – among other local and global factors.
Food and non-alcoholic beverage (NAB) inflation has rocketed to a 14-year high at 13.6% in February – more than double the upper inflation target limit, contributing 2.3% to headline inflation.
The surge in food and NAB is due to several factors, including load shedding, unfavourable weather conditions, animal diseases, geopolitical conflict and the exchange rate, said Packirisamy.
Food constraints
According to Momentum, the two most considerable price pressures come from bread & cereals and meat inflation. Bread & cereals recorded the highest rate of 21.8% in February, while meat inflation rose to 11.2%.
This meant that the contribution from bread and cereals to headline inflation increased the most, from 0.05% in January 2022 to 0.65% in February 2023, followed by the meat category, increasing from a contribution of 0.45% to 0.62% over the same period.
The increase in bread and cereals has been fueled by higher wheat prices and the depreciating rand against the US dollar, said Packirisamy.
She added that there is also a gradual switch from maize production to soy production, which could increase maize prices as supply decreases, placing upward pressure on food agoes.
Additionally, according to Agrimark Consulting, maize crops are affected by irrigation disruptions due to load shedding, which leads to lower production.
Despite this, given that South Africa is a large wheat importer, the weak currency remains the biggest constraint to lower prices of bread and cereals, said Packirisamy.
Regarding meat products, Agrimark Consulting noted that the foot-and-mouth disease outbreak last year mainly affected cattle hence the increase in beef prices. Chicken prices will also trend higher because load shedding leads to ventilation disruptions and, thus, lower production.
Given the upward price pressure on the two most significant contributors to food inflation, food and NAB inflation is expected to remain elevated, said Packirisamy.
Fuel prices and load shedding
At the end of February 2023, the Central Energy Fund (CEF) announced fuel increases of R1.27/l in petrol and 30.4 c/l in diesel in March – despite international oil prices remaining broadly unchanged in February – thanks to a weaker rand.
However, as of 23 March, the latest data from the CEF shows that the under-recovery in petrol prices seen at the middle of the month is now flat – while diesel is still on track for a sizeable cut of around 56 c/l.
Although fuel prices have been decreasing, they are still high and pose a risk to food inflation. Retailers are incurring exorbitant diesel costs to operate generators during load shedding, said Momentum.
So far, Shoprite has reported the highest cost of R93 million per month in the second half of 2022, and they estimate to spend R1 billion per year if the current rate of usage continues. Other large companies are also spending millions per month on diesel, including Pick n Pay, which saw costs rise to R60 million.
These retailers indicated that it would be challenging to hold off passing on the cost of diesel to consumers through higher food prices if diesel costs remain high and there is no support from the government.
This comes after the 2023 National Budget extended the diesel fuel levy refund to food manufacturers only, not including retailers.
As a result, food prices remain elevated, and retailers warned this would also mean that food security and the supply of medication are threatened, noted Packirisamy.
Read: IMF slashes South Africa’s GDP growth forecast for 2023
