Inflation set to climb as energy and fuel costs surge

Figures from Statistics South Africa show that the cost of living rose by 3.1% year-on-year in March, and economists expect a further increase throughout April.

Inflation is projected to rise to approximately 3.8% year-on-year in April, with monthly pressures of about 1% driven by a surge in fuel prices and higher public transport costs.

Koketso Mano, Senior Economist at FNB, said fuel and food prices will also be under pressure in April.

Prices rose on average by 0.6% in March when compared with the month before, after six of the 13 categories in the Consumer Price Index (CPI) basket recorded higher annual rates. While food price growth slowed to 3.6% year-on-year, fuel ticked up by 1.2%.

Current estimates show an under-recovery that could lead to a petrol price increase of around R2.24 per litre and an increase of R6.60 per litre for diesel in May.

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However, a major point of concern is core inflation, which has crept up by two percentage points from 3% to 3.2%. This could be viewed as secondary effects starting to spread into the economy, which will keep prices elevated.

Mano highlights that energy remains the primary driver of these upward risks.

"Energy inflation is generally the main source of upside risks in the near term; we worry about upward pressure on petroleum-related products costs. And not only that, but also general energy costs in the economy, given that we are also grappling with Eskom’s latest tariff increase."

Mano expects headline inflation to surge to 3.8% in April, slowing the pace of disinflation. This will be a significant concern for the South African Reserve Bank, which will decide on interest rates again in May.

"If the war is short-lived and prices decelerate, they may not immediately pass that benefit to the consumer to try and rebuild margins, so it might also slow the pace of disinflation," Mano says. "Either way, we are grappling with higher inflation than we thought we would be dealing with coming into this year."

Economists expect the impact on inflation to linger, with the lagged effects of the oil price shock likely to manifest in the next CPI print.