The latest inflation expectations survey from the Bureau of Economic Research (BER) shows that all sectors of society in South Africa expect higher inflation to last longer – while expectations for wage and salary increases have been lower.
The BER survey is conducted quarterly and polls the views of key sectors in the economy, including the views of analysts, unions, households and businesses.
The study was commissioned in 2001 by the South African Reserve Bank and is part of the comprehensive set of data that the central bank’s Monetary Policy Committee (MPC) looks at when modeling its inflation data and then its approach to interest rates.
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The four groups are questioned because each has a different perspective and impact on inflation, according to the BER.
“For example, business people influence prices in the real economy, while analysts influence financial markets. In contrast, union representatives and households – in their role as workers – influence wage increases, which in turn have a major impact on inflation,” the report said.
The MPC will be concerned if inflation expectations rise, inflation expectations are significantly above the midpoint of the inflation target of 3% to 6% and/or other inflation indicators deteriorate.
For example, rising inflation expectations can lead to higher wage demands, as workers feel they should be compensated for higher expected inflation in the future.
Companies can also adjust their price increases upward if demand is robust enough. To prevent higher expectations from becoming reality, the SARB may be forced to raise interest rates.
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The BER said the opposite happens when inflation expectations and other indicators fall.
Inflation expectations for the first quarter of 2023 have remained higher among all respondents, meaning that the prevailing view is that inflation will remain at higher values for longer.
The average inflation expectations of analysts, entrepreneurs and unions for 2023 and 2024 have increased by 0.2 percentage points (percentage points) compared to the fourth quarter of 2022.
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They predict inflation averaging 6.3% in 2023 and 5.8% in 2024. After that, respondents expect inflation to decrease to 5.5% in 2025.
While analysts expect inflation to reach 4.6% in 2025 (i.e. halfway to the SARB inflation target), trade unionists expect 5.8% (just below the upper limit) and businessmen 6.2% (still above the upper limit ).
Average five-year inflation expectations remained unchanged at 5.5%.
However, households are even more pessimistic, with inflation expectations projected one year ahead, jumping from 6.3% to 7.0%. Similarly, their five-year expectations rose from 8.4% to 9.9%.
On average, respondents also expect economic growth to be lower in 2023, at only 1.0%. This is half of what they expected a quarter earlier. They expect economic growth to pick up slightly to 1.5% in 2024.
Of the three social groups, at the bottom, analysts expect growth of 0.5% this year, with business people at 1.0% and union officials at 1.4% at the top.
Consistent with a broader view of lower inflation and economic growth, respondents have downgraded their average forecasts of salary and wage increases for this year. They now expect an increase of 5.3%, compared to 5.9% previously.
However, this is below expectations for inflation for the year (5.9% versus 6.3%).
The study was conducted between February 20 and March 9, 2023, and the results were calculated on March 10, 2023.
The SARB’s MPC is expected to make a decision on interest rates by the end of the month (March 30), with markets expecting another 25 basis points hike.
Read: South Africa has reached a new low – and it could be worse: Reserve Bank
