Transport Costs Drive CPI Surge As Fuel Inflation Hits 28.7 Percent

Transport inflation surged as petrol and diesel prices climbed significantly, while electricity and municipal tariffs continued to weigh on consumers. The higher inflation environment is expected to curb household spending growth and could prompt a further interest rate hike from the South African Reserve Bank in July before conditions potentially improve later in the year.

A key driver behind this inflation uptick is evident in transport costs.

The Transport sub-index, the index within which fuel prices reside, increased its contribution to the overall CPI inflation rate significantly, from +0,7 of apercentage point in April to +1,3 percentage points in May. This increase was largely responsible for the surge in CPI inflation to 4,5%.

The Transport CPI inflation rate was 9,4% in May, with the fuel-cost component of this index inflating year-on-year by a massive 28,7%. At the beginning of May, domestic petrol prices rose sharply by over R3/l, and diesel prices by over R6/litre, driving the CPI – Transport Fuel sub-index of the CPI sharply higher.

The Housing and Utilities CPI remains the other big inflation driver While much is being said of fuel -price increases, the Housing and Utilities CPI, the major sub-index with the largest weighting in the overall CPI, remained the “co-largest” contributor to the May CPI inflation rate, also accounting for 1,3 percentage points of the overall 4,5% inflation rate. This major sub-index inflated by 5,3% year-on-year.

Rentals moderated this inflation rate somewhat, with residential rentals recording 4% inflation for actual rentals and 3,9% for owner-equivalent rental inflation. These rates were unchanged from April due to May not being a survey month for rentals.

However, it is the municipal rates and utilities tariffs component of this CPI sub-index that are most troublesome inflation-wise, with the Electricity CPI inflating at 9,4% and the “Water Supply and Miscellaneous Services” CPI (municipal rates and non-electricity utilities tariffs) inflating by 6,9%.

Transport aside, Restaurants and Accommodation Services showed the highest inflation of the major CPI sub-indices After the Transport CPI, the highest inflation rate of the major CPI sub-indices was that of Restaurants and Accommodation Services, recording 5,8% year-on-year, followed by Insurance and Financial Services, recording 5,7% year-on-year, and Education at 5,4%.

Food-price inflation remains subdued despite talk of risks emanating from the Gulf Conflict. Thankfully, the all-important Food and Non-Alcoholic Beverages CPI showed moderate inflation of 1,9% in May, down from 2,9% in April. We need to await the coming months’ data to see what the possible impact of recently high diesel prices along with Gulf War-induced fertilizer shortages might have on food prices, but so far so good.

Implications of the CPI inflation surge for the consumer In my economic-growth forecasts of recent months, I have projected a slowdown in real household disposable-income growth, in part due to rising inflation eating into household income, but also because higher inflation has already started to drive Sarb interest-rate hiking in May, which can further eat into disposable income.

The result is the expectation of a slowdown in real household-consumption expenditure growth in 2026, from last year’s solid 3,6% growth rate.

Luxury and non-essential spending has likely seen some slowing growth, along with low-frequency “postponable” purchases. This is likely to lead to the most notable growth slowdown being in durable goods (including furniture, household appliances and motor vehicles) and semi-durable goods (including clothing and footwear) consumer spending.

Holiday and leisure-spending growth is also likely to experience a slower patch as consumers reprioritise expenditure, especially given that such spending often includes transport at currently inflated fuel prices. In addition, I do foresee slower credit-dependent home buying in the near term.

Rate hike outlook

Implications for the Sarb interest-rate decision in July – one further 25 basis point hike is expected, although the inflation outlook improves thereafter.

The May inflation rate, having accelerated noticeably further on April, is expected to contribute to one further 25 basis point interest-rate hike at the Sarb's July MPC (Monetary Policy Committee) meeting.

Thereafter, however, I expect the Bank to end the current bout of interest-rate hiking. While the outcome of the Iran conflict and its impact on global oil supply and prices remains hazardous to predict, it would appear that the US and Iran have moved closer to a deal to end the closure of the Strait of Hormuz (crucial for the normalisation of global energy supply) at the time of writing.

I believe there is a strong political motivation for the US to move to end the Iranian conflict, given the approaching mid-term elections in that country.

This is because the cost-of-living issues in the US is a major campaign issue, and the high oil and fuel prices are not positive for the incumbent Republican Party’s campaign.

I therefore believe that the chances of an end to hostilities in the near term are high, and in recent days we have seen a major drop in oil prices as the markets increasingly bet on this outcome.

Central Energy Fund data through June to date points to a possible reduction in fuel prices early in July.

While the Sarb is likely to remain concerned about second-round effects from fuel-price inflation at its July MPC meeting, as suppliers pass on recent input cost increases through the supply chain, I expect an improved global inflation environment to bring the current cycle of rate hikes to an end later this year.