Brace yourself for higher inflation numbers this month: Absa

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South Africa’s core inflation likely rose at its fastest pace in six years in February, spurred by a sharp rise in health insurance premiums, Absa said.

The main consumer price index, which excludes the effects of volatile items including food and energy, likely rose 5.2% year on year last month from 4.9% in January, Absa economists led by Miyelani Maluleke said in a research note.

That would be the highest rate since February 2017. Headline inflation likely rose from 6.9% to 7%, they said.

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The central bank is targeting inflation of 3% to 6%, with the MPC preferring to anchor expectations in the middle. Core inflation has not accelerated in the past three months.

“Given heightened inflation risk concerns at this time, the market may initially read such a jump in core CPI inflation as an indication of rising inflationary pressures,” the economists said. “However, the data needs a closer look to distinguish between rising inflationary pressures and idiosyncratic factors associated with medical health insurance.”

Health insurers, including South Africa’s largest medical device provider, Discovery Ltd., along with Medihelp Medical Aid and Momentum Health Medical Scheme, have begun raising prices after keeping them low for the past two years, now claims returning to pre-Covid-19 levels, the cost of care is rising and excess reserves are shrinking.

“Based on announcements from various medical assistance providers, we estimate that health insurance premium inflation will average 6.4% in 2023, compared to 4.2% in 2022,” the Absa economists said. “As the category accounts for 7.1% of total CPI and 9.5% of core CPI, higher inflation will have a significant effect on CPI data when examined in February and April.”

Still, mounting price pressures from a 7% depreciation of the rand against the dollar this year, as well as rising food and gasoline costs, could lead the central bank’s monetary policy committee to raise interest rates when it meets at the end of this month. Term rate agreements, used to speculate on borrowing costs, show traders pricing in a 25 basis point increase.

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Pretoria-based Statistics South Africa will release inflation data for February on March 22.

Absa is South Africa’s third largest bank.

Read: Price shock for South Africa as food inflation hits 14-year high

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