By: Mamello Matikinca-Ngwenya, Siphamandla Mkhwanazi, Thanda Sithole, Koketso Mano
Surprise surprise, inflation undercuts expectations so far in 2025
The year 2025 has offered us many surprises so far. From shocking reciprocal tariffs to the ambushing of visiting heads of states in the White House, the relative calm once associated with global cooperation feels increasingly like a distant memory. While the United States (US) navigates the risk of structurally higher inflation, exacerbated by threats to the Fed's independence, South Africa (SA) has enjoyed subdued inflation and aims to sustain current rates of general price level growth over the long term. Therefore, while global political and trade tensions have dampened local growth prospects, actual inflation outcomes have positively surprised us. We highlight the driving forces behind these developments in this piece.
It is not that surprising considering the macros
In the absence of supply shocks, weak economic activity begets benign inflationary pressure. Economic growth in SA remains structurally weak and poor labour market conditions have contained demand. Furthermore, weak demand-driven inflation is consistent with fiscal consolidation and restrictive monetary policy. SA has also been fortunate that market fundamentals have kept oil prices soft. At the same time, concerns around macroeconomic balances in the US have weighed on the dollar to the benefit of riskier market currencies such as the rand. These trends have been conducive to lower imported and domestically generated inflation. Compared to the start of 2025, inflation forecasts have been revised downward considerably - from 4.0% in February, post- statistical basket and index base revisions, to a current expectation of 3.4%.
A deeper look into the consumer price index basket reveals interesting details
Unpacking the consumer price index basket reveals that the largest downward revisions have been to alcoholic beverages and tobacco; furnishings, household equipment and routine maintenance (home contents); transport; education services; as well as restaurants and accommodation services. While the downside surprise in education services suggests that the claw-back-induced normalisation in services inflation has not been broad-based, inflation in accommodation services has been stickier and more volatile in the post-pandemic period - likely reflecting the protracted recovery in tourism and elevated input costs that have been exacerbated by severe weather disruptions and service delivery failures.
Of more interest is what could be developing in the core goods space. While alcoholic beverages and tobacco inflation would have been affected by effective sin tax increases that were announced later in the year, we are paying attention to how trade patterns may affect imported inflation. We have already witnessed the influx of Asian vehicle brands in SA and believe the impact is starting to show up in the transport inflation figures. Vehicle price inflation has continued a downward trend this year, settling at 1.5% in July, after a brief recovery between 2022 and 2023 where inflation breached 8% and below the near 5% five-year average before the pandemic year.
Meanwhile, there may be a post-pandemic overhang in home contents inflation. Alongside the supply-chain related post-pandemic surge in core goods inflation, pent-up home refurbishment demand that was driven by the work-from-home transition would have also supported inflation rising from 2.1% at the end of 2021 to 6.1% at the end of 2022 and a peak of 6.9% in early 2023. Base effects would have kept inflation muted before normalising this year. There appears to be a turn in the aggregate core goods inflation figure; however, home contents show further disinflation - and reflects deflation when excluding goods and services for routine household maintenance. Could this be indicative of developing structural trends? Are changing trade patterns and the likely lean to the East already driving inflation down in SA?
While we have enjoyed the benefits of lower inflation, we are likely to see rising trade protections arresting some of these gains. We agree that such measures are necessary for local industry preservation but a competitive economy, on the local and international front, is key to lowering inflation sustainably. Until then, we don't like surprises but lower inflation than expected is one we will take.
Week in review
The leading business cycle indicator rose by 0.4% m/m in June to 111.7 points, following a 1.3% decline in May. The improvement was driven by gains in three of the seven available components, with the largest contributions coming from an acceleration in the six-month smoothed growth rate of real M1 money supply and an increase in South Africa's US dollar-denominated export commodity price index. However, despite the monthly uptick, the indicator declined on an annual basis for the third consecutive month, highlighting a subdued growth environment in line with our 1.0% GDP growth forecast for 2025.
Within the transport subcomponent, there has also been weakness in passenger transport services inflation, which is in line with fuel price deflation.
Producer inflation accelerated to 1.5% y/y in July from 0.6% in June. On a monthly basis, prices rose 0.7%, driven mainly by increases in petrol and diesel, transport equipment, and non-metallic minerals. Food prices, however, declined month-on- month, helping to contain overall pressure. Annual food inflation eased slightly to 3.5% in July from 3.6% in June, though meat inflation remained in the double digits at 18.2% (from 20.6%). Other food products inflation was 2.4%, while grain mill and animal feed recorded deflation. Although petrol and diesel prices are still falling, the pace of decline has slowed. Overall, producer inflation has remained subdued, averaging 0.7% year-to- date. We forecast an average of around 1.2% for this year, rising to about 3% in 2026.
Private Sector Credit Extension (PSCE) growth accelerated to 5.8% y/y in July, up from 5.0% y/y in June. Household credit growth remained subdued at 3.0%, slightly lower than the 3.1% recorded previously. In contrast, corporate credit continued to outperform, rising to 8.3% from 6.6% in the prior month. Within the corporate segment, loans and advances increased to 9.9% from 8.1%, driven by stronger growth in general loans (12.7% vs. 9.1%) and vehicle asset finance (8.1% vs. 5.7%), while mortgages held steady at 6.8%. In the household segment, car finance edged up to 7.2% from 6.8%, whereas mortgage growth slowed to 2.0% from 2.2%. Aside from credit cards, which maintained a solid growth rate of 7.0%, unsecured credit extended to households remains weak, reflecting persistently high default rates.
Week ahead
Manufacturing PMI data for August will be released on Monday. In July, the PMI rose by 2.3 points to 50.8, climbing above the neutral-50 mark for the first time since October 2024. The improvement was driven by a sharp rebound in new sales orders (a demand proxy), which jumped to 55.9 from 46.1. Meanwhile, business activity (a supply proxy) increased to 47.1 from 41.9, indicating that production remains subdued, which is consistent with inventories ticking up to 51.1 from 49.9. The employment index fell by 6.0 points to 43.7, underscoring persistent labour market challenges in the sector, and the supplier performance index rose by 1.3 points to 56.4, pointing to longer delivery times in July. More concerning, however, was the expected business conditions index, which dropped by 6.1 points to 56.4, signalling reduced optimism among manufacturers. This aligns with ongoing weakness in output and rising concerns over the impact of US tariffs.
New vehicle sales data for August will also be released on Monday. In July, total new vehicle sales rose 15.6% y/y to 51 383 units. This was underpinned by a 20.1% increase in passenger car sales to 36 248 units, marking thirteen consecutive months of growth. Commercial vehicle sales expanded by 6.0%, supported by gains across light, medium, and heavy categories, representing the fourth straight month of growth. The strong performance in new vehicle sales continues to be supported by a low and stable inflation environment, recent interest rate reductions, and resilient demand for entry-level and affordable brands.
On Thursday, the RMB/BER Business Confidence Index (BCI) for 3Q25 will be published. In 2Q25, the BCI declined by five points to 40, signalling a pause in business sentiment recovery that began in 2Q24. Despite remaining above the 2023-2024 average, confidence dipped slightly below the long-term norm. The results were shaped by several external and domestic factors that prevailed at the time, including diplomatic tensions between the US and SA, global trade uncertainty, and persistent local logistical challenges.
Also on Thursday, data on electricity production for July will be released. In June, electricity production decreased by 1.3% y/y, down from 2.3% growth in May. On a seasonally adjusted basis, electricity production fell by 1.4% m/m, following a 1.5% increase in May.
We will close the week with gross foreign exchange reserves for August. Foreign reserves reached a new record of $69.2 billion in July, up from $68.4 billion in June. The increase was mainly due to higher gold and foreign currency reserves.
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