By Koketso Mano
Headline inflation fell to 3.0% y/y in February, from 3.5% in January, reaching the South African Reserve Bank's revised inflation target for the first time. The print was lower than our forecast of 3.2% and the market expectation of 3.1%. Monthly pressure was 0.4%, mainly due to services inflation, while food and fuel deflation mitigated the pressure.
Core inflation slowed to 3.0%, from 3.4% previously, with monthly pressure of 0.7%. Services inflation recorded 1.1% m/m, and 3.8% y/y, led by medical insurance. Core goods inflation was -0.2% m/m and 0.9% y/y.
Average fuel prices fell by 3.1% m/m and 10.1% lower than in February last year.
Food and non-alcoholic beverages (NAB) inflation slowed to 3.7% y/y. Average prices were down 0.3% m/m, which mainly reflected meat deflation.
Outlook
Including this data in our model suggests that headline inflation will increase slightly in March, to around 3.1% y/y, with monthly pressure of 0.5%. The momentum will once again be driven by services inflation as new data on education and housing are released. While the momentum on food may remain soft, supported by cereal price compression, we still worry about volatility risk as biosecurity issues continue to impact the agricultural market. Fuel prices were hiked in March, and this will compound monthly pressure.
We expected headline inflation to remain contained and close to the 3% target over much of this year. This would have materialised even with a normalisation in services inflation as softer goods inflation would have been sufficient to counteract the upward pressure. However, the war in the Middle East poses upside risk. These risk events will likely persist over the longer-term, a reminder that continued political fracturing across the globe will sustain economic uncertainty - which is often coupled with heightened risk aversion and less supportive financial conditions. For a net-importer of petroleum products such as South Africa, persistently elevated import costs will raise headline inflation above our baseline. This would initially show up in transport inflation, specifically fuel from April, before spreading to other costs. The Monetary Policy Committee (MPC) would be worried if they see this shock as less transitory and would want to limit second-round effects.
Fortunately, inflation expectations have continued to soften towards target, with the latest BER survey result for 1Q26 showing an average of 3.6% across various time horizons. This alleviates the pressure on the monetary policy mandate, but it is highly likely that in the face of a material inflation shock, we see the MPC keep rates on hold.
The March inflation print is scheduled for release on 22 April. Major periodical surveys conducted in March include housing and related services (17.05% weight in CPI), transport (2.74%), as well as education and boarding fees (2.47%).
