South African Rand: inflation risks from El Niño – Commerzbank

Commerzbank analyst Volkmar Baur points out that South African inflation unexpectedly declined in August, with the Consumer Price Index (CPI) falling to 4.3% and core inflation at 4.2%. The primary reason for this decline is attributed to reduced gasoline and food prices. However, Baur warns that high oil prices and a strong El Niño phenomenon could pose risks to future food costs, potentially leading to sustained breaches of the inflation target.

The core rate shows that the overall inflation decrease is mainly due to lower gasoline and food prices. While gasoline prices have stabilized, they are expected to increase again in September if global crude oil and petroleum product prices remain high. More concerning is the anticipated rise in food prices. Meteorologists predict that an El Niño event will occur this year, which typically brings warmer and drier conditions to South Africa between November and March.

The likelihood of a very strong El Niño is estimated at 90%, and there is a 69% chance it will be the strongest one since records began in 1950. The previous two strong El Niño events in 2015/16 and 2023/24 caused maize harvests to drop by 20% to 50%. In 2016, this resulted in a 15% increase in grain prices. As the year progresses, the chances of missing the inflation target persistently rise.