South Africa is poised to see consumer prices inch closer to the midpoint of the South African Reserve Bank’s (SARB) target range for the first time since 2021, primarily due to a slowdown in global oil prices. Analysts suggest that this could potentially pave the way for a reduction in interest rates. However, caution is advised, as economists warn of upside risks to consumer price inflation (CPI), including the vulnerability of the rand, escalating food prices, and the ongoing global shipping crisis.

In 2023, headline inflation remained above the 4.5% midpoint of the inflation target range, fueled by fuel price volatility, severe rotational load shedding, and logistical challenges at South Africa’s ports later in the year. The recent drop in petrol prices by 76 cents a litre and diesel by R1.18c/litre has provided some relief, with further modest fuel cuts expected in February that could ease inflationary pressures in the coming months.

Annabel Bishop, Chief Economist at Investec, suggests that headline inflation is currently on track to be around 4.5% year-on-year. However, she points out potential risks from food prices, a weaker rand, and higher global commodity prices, indicating that the overall average could face upside pressures. Investec’s current forecast predicts CPI inflation to reach 4.5% year-on-year in July, dip to 3.4% in October, and return to around 4.0% in December due to base effects. Yet, upside risks may jeopardize this trajectory.

Bishop notes that the South African Reserve Bank’s Monetary Policy Committee (MPC) would likely view a stronger rand favorably to help lower inflation, given the significant impact of rand weakness on inflation. Fuel prices are pivotal for South Africa’s inflation outcomes, and a stronger rand could facilitate greater petrol price cuts, potentially contributing to lower food price inflation and other commodity price declines.

Despite muted concerns about El Niño in South Africa, adverse weather conditions in 2024 could pose a risk to inflation, particularly in driving up food prices. Additionally, a new global risk has emerged with a series of attacks on ships in the Red Sea, a critical route for approximately 30% of all container shipping traffic.

Several shipping companies have suspended operations in the region, redirecting ships around the Cape of Good Hope. This reduction in shipping capacity, coupled with increased fuel and insurance costs, has led to a 200% surge in shipping container prices on routes that typically pass through the Red Sea.

Ben May, Director of Global Macro Research at Oxford Economics Africa, highlights the major ramifications of these attacks on the shipping industry, adding to global inflation risks. While the assumption is that the disruption will be short-lived, an extended closure of the Red Sea to shipping could add 0.7 percentage points to annual CPI inflation rates by the end of 2024, impacting various sectors and firms.

May concludes that while such a scenario might not halt the overall global inflation slowdown expected in 2024, it could influence central banks, including the Federal Reserve to reassess rate cuts.