South African Rand: inflation risks from El Niño – Commerzbank

Commerzbank’s Volkmar Baur notes South African inflation surprised on the downside in August, with headline Consumer Price Index (CPI) at 4.3% and core at 4.2%. He attributes the easing mainly to lower gasoline and food prices but warns that high Oil prices and a likely strong El Niño threaten future food costs, raising risks of prolonged breaches of the inflation target.

Lower CPI now, rising risks ahead

"A look at the core rate shows that the easing in the overall rate was mainly due to falling gasoline and food prices. As for gasoline prices, it is already clear that they will not provide any relief in August. On the contrary, if global prices for crude oil and petroleum products remain high, the monthly gasoline prices in South Africa are likely to rise again in September."

"More serious, however, is the outlook for food prices. Meteorologists increasingly agree that an El Niño will occur again this year, which typically brings warm and drier weather to South Africa between November and March."

"Meteorologists also estimate that the probability of a very strong El Niño this year is around 90%. The probability that it will be the strongest El Niño since records began in 1950 is currently estimated at 69%."

"The last two strong El Niño episodes in 2015/16 and 2023/24 led to a decline in the maize harvest - South Africa’s most important staple food - of between 20% and 50%. In 2016, this resulted in an annual price increase of about 15% for grains."

"As the year progresses, the risks of missing the inflation target over a prolonged period are thus increasing once again."