Analysts, business people and trade unions in South Africa are now expecting the headline consumer price inflation (CPI) to ease slightly from previous forecasts as fuel and food prices continue to decline.
This comes as the CPI sank below 5% in July, the lowest in three years, slowing to 4.6% in July from 5.1% in June, after holding steady for 10 months in the 5% to 6% range, largely driven by slowing food and non-alcoholic beverages prices.
In the US, inflation also fell to 2.5% in August from 2.9% in July, setting the stage for the Federal Reserve to start cutting interest rates gradually at its meeting next week.
According to the Inflation Expectations Survey for the third quarter of 2024 released by the Bureau for Economic Research (BER) yesterday, the average inflation expectations of these three social groups declined again during the third quarter survey.
The BER said analysts, business people and trade unions now expect headline inflation to be 5.1% this year, before subsiding to 4.8% in both 2025 and 2026.
In the second quarter they still expected consumer inflation to register 5.3% this year and fall to 4.9% in 2026.
Among the three social groups, analysts expect the lowest inflation rate over the entire forecast horizon, although trade union officials are not far above them.
In contrast, business people anticipate that inflation will remain above 5% for all three years, softening from 5.4% this year to 5.2% in 2026.
“Overall, the three social groups expect inflation to average 4.8% over the next five years. This is slightly lower than the 4.9% they expected before. However, in this case only analysts expect a rate close to the target of 4.5%, trade union officials foresee a rate around 5%, similar to business people,” said BER deputy director, Craig Lemboe.
“Household inflation expectations turned significantly higher during the third quarter survey, ending the downward trend that started in the middle of 2023. One-year-ahead expectations picked up by 0.6% pts to 6.9%, the highest this year.”
The 2024 third quarter survey of financial analysts, business executives and representatives of the trade union movement was conducted between 12 and 29 August and the results were computed on 30 August.
The results of the inflation expectations survey are one of many factors that the Monetary Policy Committee (MPC) of the SA Reserve Bank (SARB) considers when it decides on the interest rate.
Since headline inflation is steadily winding down and settling around the 4.5% midpoint of the SARB’s inflation target range of 3-6%, this has raised market expectations that the SARB’s MPC will next week begin the interest rates cutting cycle with a 25 basis points after four years of heightened cost of borrowing.
According to economists, Rising inflation expectations may, for example, lead to higher wage demands as workers feel they need to be compensated for the higher expected inflation in future.
The BER said businesses may also adjust their price increases upwards if demand is robust enough.
To prevent higher expectations from becoming a reality, the SARB may be forced to increase the interest rate. The opposite happens if inflation expectations and other indicators decline.
The BER said that five-year-ahead expectations increased by 0.9 percentage points to 10.6%, the highest since the second quarter of 2023.
During the third quarter survey, the three social groups still expected GDP growth of just below 1% in 2024.
However, they revised their forecast for next year up by 0.2% percentage points to 1.5%. Trade unions made a huge upward revision to their forecast of wage increases.
They now expect wages to rise by 5.6% in 2024 and by 5.9% in 2025. Consequently, the average forecast for 2025 increased slightly from 4.9% to 5.0%, while that for 2026 increased from 4.9% to 5.3%.
BUSINESS REPORT