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Reflections #35 - SA inflation eases...USDZAR peak behind us?

Headline inflation in South Africa came in at 6.3% yoy in May 23, below expectations of 6.5%. The drop towards the 3-6% inflation target band comes as good news for households as food inflation, which has been the biggest driver of overall inflation in South Africa, is also coming down sharply.

Consumers in South Africa were hit hard as key basic food items are somewhere between 20-50% more expensive than last year. After peaking at an annual rate of 37.6% in August 2022, the index for oils and fats continued to fall sharply in May, recording a ninth consecutive month of decline. Prices for oils & fats decreased by 2.2% between April and May 2023, pulling the annual rate down to -2.4%. Bread and cereals inflation slowed to 18.1% in May from 20.8% in April according to Stats SA.

Hence, today's numbers are a sigh of relief for the consumer.

What about ZAR?

The ease in inflation is good news for the beleaguered rand which trades at all-time lows to the USD. The ZAR is traditionally highly correlated to long end SA rates and the fall in inflation makes the long end very attractive with nominal yields above 10% and real yields around 4%.

Provided the peak in inflation is behind us, don't get overly bearish in ZAR as the attractive long end could easily lift the rand from very low levels.


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