Inflation falls to 4.3% but these three costs are still driving prices higher

In July, South Africa's inflation rate fell to 4.3% from 5% in June, but certain sectors continue to influence the overall figure. Housing and utilities inflation stood at 5.2%, transport at 8.9%, and insurance and financial services at 5.7%. These three categories contributed 3.1 percentage points to the 4.3% headline rate.

One of the main drivers of this inflation was the significant rise in electricity prices in housing and utilities, which surged by 8.3% year-on-year and 7% month-on-month following higher tariffs in July. Water supply and miscellaneous services saw a 6.4% increase over the year, while actual rentals climbed 4.1%.

Investec's chief economist, Annabel Bishop, emphasized that housing and utilities' price hikes were primarily due to rentals, electricity, and water prices, with the electricity price increase captured in July. Dr Lerato Ntuli, an economist at Anchor Capital, highlighted that the July electricity price hikes were a significant factor in the category's inflation remaining high, even as the pressure eased.

Transport costs were also affecting inflation, driven by fuel and passenger transport expenses. Fuel prices were 20.6% higher than a year earlier, and passenger transport services rose 11.8%. While transport inflation eased from June, fuel prices were 20.6% higher than a year ago, and passenger transport services increased 11.8% year-on-year.

Insurance and financial services remained a cost driver, with the category up 5.7% over the year. On a monthly basis, financial services costs rose 0.7%, balancing out a drop in insurance costs. Despite the moderation in headline inflation, economists remain cautious about potential upside risks from oil prices, fuel costs, and the broader inflation outlook.

Consequently, the South African Reserve Bank (SARB) is likely to maintain a restrictive monetary policy stance, with a possible additional 25 basis points rate increase during the second half of the year.

Economists also noted that food inflation fell from 1.4% in June to 0.6% in July, with little evidence that earlier fuel and fertiliser cost increases had passed through to food prices. A slight increase in furniture inflation, particularly for lounge and bedroom furniture, was speculated to be due to seasonal purchasing patterns. The SARB is expected to keep rates unchanged at the September meeting, giving the central bank room to hold inflation around 4.5% in the coming months.