Analysts revise South Africa's inflation outlook amid cautious optimism

A majority of South African financial analysts, business executives and representatives of the trade union movements are expecting the cost of living to remain contained within the 4.5% midpoint of between 3-6% target range this year.

The Bureau for Economic Research (BER) said on Monday that expectations for South Africa’s headline consumer inflation in 2025 have been slightly adjusted from 4.5% to 4.3%. 

This revisitation comes even as annual inflation saw a minute uptick from 2.8% in October to 3.2% in January, indicating a level of cautious optimism against the backdrop of a lower reference rate.

The recent Inflation Expectations Survey for the first quarter of 2025 was conducted among various stakeholders between 17 February and 6 March 2025 and the results were computed on 7 March 2025.

BER’s senior economist, Nicolaas van der Wath, said analysts were more optimistic among the three social groups, expecting inflation of only 3.9% this year, then stabilising at 4.3% in the following two years. 

“Business people anticipate a rate of 4.6% this year, then 4.8% over the next two years. On the pessimistic side, trade union officials forecast an acceleration from 4.5% in 2025 to 5.0% by 2027,” Van der Wath said. 

“Regarding inflation over the next five years, the three social groups anticipate an average of 4.7%, marginally above the targeted midpoint and slightly up from 4.6% before.”

Against a similar backdrop, Van der Wath said households also revised their forecast of inflation in the next year down significantly. He said they were now expecting a rate of 5.7% in the next 12 months, compared to 6.6% during the fourth quarter of last year.

“In line with their lower inflation forecast during the first quarter of 2025, the three social groups also lowered their expectations for an increase in salaries and wages in 2025. They now foresee, on average, that wages will rise by 4.5% this year, which is lower by 0.4 percentage points compared to their fourth-quarter forecast,” he said.

“However, they foresee a more substantial increase next year (4.8%). The survey respondents expect economic growth of 1.2% in 2025, slightly lower than the 1.5% anticipated during the fourth quarter survey. Looking further ahead, they forecast economic growth to accelerate very little, reaching only 1.4% in 2026.”

The results of the inflation expectations survey are one of many factors that the Monetary Policy Committee (MPC) of the South African Reserve Bank (Sarb) considers when it decides on the interest rate. 

The MPC will announce its second interest rates decision for 2025 on Thursday after Statistics South Africa publishes the annual headline consumer inflation rate for February on Tuesday. 

The annual consumer price inflation was 3.2% in January 2025, up from 3.0% in December 2024, an increase of 0.3% month-on-month in January.   

The MPC will be concerned if inflation expectations increase, inflation expectations are significantly above the midpoint of the inflation target range of 3% to 6% or if the other inflation indicators deteriorate. 

Rising inflation expectations may, for example, lead to higher wage demands as workers feel they need to be compensated for the higher expected inflation in future. Businesses may also adjust their price increases upwards if demand is robust enough. 

To prevent higher expectations from becoming a reality, the Sarb may be forced to increase the interest rate. The opposite happens if inflation expectations and other indicators decline.

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