In December, the CPI rate slowed to 3.1% from 3.2% in November, Statistics South Africa (Stats SA) said. That is almost at the bottom of the South African Reserve Bank’s mandated inflation target of between 3% and 6%. The average inflation rate for the year was 3.3%, the lowest since 2004, when it was 1.4%. Before that, you have to go back to the Woodstock era to find a lower average. That would be 1969, when it averaged 3.0%.

One point of concern for the Monetary Policy Committee (MPC) will be food price inflation, which accelerated to 6% in December from 5.8%. But that is expected to be contained later in 2021 on expectations of a bumper maize harvest.

Inflation is muted, but rising food prices a concern in a sea of poverty

The reasons for this state of affairs are hardly benign. Muted inflation is only to be expected in an economy that contracted between 8% and 10% — and perhaps more — over the course of the year, with an unemployment rate north of 40% by its widest and most telling measure. And much demand was simply stifled by lockdown measures to contain the Covid-19 pandemic’s deadly march. 

“While we expect inflation to remain within the target band, we cannot ignore the growing risks to the inflation outlook. The rise in the oil price is a key risk to the inflation outlook, while the currency has shown some resilience recently on the back of supportive global financial conditions,” FNB chief economist Mamello Matikinca-Ngwenya said in a commentary on the data. 

The combination of the rand/dollar exchange rate and world oil prices will clearly be weighed by the MPC, though it is not clear if the recent crude rally will be sustained with second and third waves of the pandemic sweeping the globe and a quickening of the pace towards greener energy sources.

The inflation data certainly suggest the MPC has room to cut its key lending rate again after slashing it in 2020 by 300 basis points to 3.5%. This unprecedented loosening of monetary policy does not seem to have stoked inflationary pressures, but the MPC may say that the full impact of the cuts has not filtered through the economy yet.

Having said that, when they do, it hardly seems as if inflation will breach the upside of the target any time soon. One thing to watch in the MPC statement will be its outlook on inflation. If there is no cut on Thursday, one may still be in the offing. BM/DM