SA’s current inflation target of 3% to 6% was introduced in February 2000. At the time, the annual inflation rate was a very modest 2.3%, but it had averaged 7.3% over the preceding five years, spiking to over 10% at times.
Keeping the inflation rate persistently inside the target range is challenging for a variety of reasons. These include the volatile and relatively weak rand exchange rate; above-inflation wage increases in key economic sectors, including the public sector; poor productivity growth in most industries; sustained large increases in key administered prices ; and a rise in import intensity.
This view is supported by a very welcome easing of food inflation to just over 4% in May 2024 , a decline in fuel prices, and the recent outperformance of the rand exchange rate. They have all cut rates on at least four or more occasions in the past year , and they have all lowered interest rates by between 175 basis points and 575 bps.
Encouragingly, the election outcome received a favourable response from financial markets and SA’s inflation rate is expected to moderate further over the coming months. ADVERTISEMENT: CONTINUE READING BELOW This would allow the Sarb to commence the interest rate cutting cycle in Q3 2024. Consequently, the inflation rate for a wide range of consumer goods and some services has been extremely subdued for many months, averaging below 3% in the first five months of 2024.
The cost of water rose by an average of 7.9% in the first five months of the year, education by 6.1% and medical aid by 10.6%. Large price increases in essential services are not SA’s only longer-term inflation concern. Two other factors need to be highlighted.
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