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Frederick Mitchell, Chief Economist | Aluma Capital (Pty) Ltd
Frederick Mitchell
February 27, 2025

Consumer Inflation

January 2025

In January 2025, South Africa’s CPI data showed revised weightings, highlighting increased importance for food, water, and electricity. While inflation rose to 3.2%, it remains manageable. A recent 25 basis point interest rate cut by the MPC signals potential further reductions, offering hope for consumers, and stimulating economic demand.

The January 2025 Consumer Price Index (CPI) data revealed revised category weightings, with slight adjustments in names and descriptions. Analysts were keen to see how the new CPI basket would reflect these changes. Water and electricity prices gained importance, with their weightings rising from 3.2% to 3.8% and from 3.8% to 4.1%, respectively. Meanwhile, the weighting for food and non-alcoholic beverages increased from 17.2% to 18.2%. These shifts indicate that basic services and food are becoming larger components of household expenditures and inflation, while the significance of housing, utilities, and financial services has diminished due to changing consumer spending patterns in the face of economic stagnation.

These weightings are subject to change in the next 24 to 36 months as the economic landscape evolves, potentially requiring future adjustments. Despite the changes in category names and descriptions, inflation rose by 3.2% in January 2025 compared to January 2024, slightly above the 3.0% recorded in December 2024 but still aligned with market expectations. This increase was mainly driven by:

  • Housing and Utilities: up 4.5%, contributing 1.1 percentage points
  • Food and Non-Alcoholic Beverages: up 2.3%, contributing 0.4 percentage points
  • Restaurants and Accommodation Services: up 4.9%, contributing 0.3 percentage points

For January 2025, the annual inflation rate for goods was 2.4%, up from 1.9% in December 2024, while services inflation increased by 4.0%, slightly slower than the 4.2% in December. Although these categories are experiencing price hikes, the overall growth rate remains slow, putting pressure on household budgets and diminishing purchasing power. This is evident in trade statistics from SARS, which show lower general import numbers in South Africa. Many households are relying on short-term credit to maintain their lifestyles, increasing their vulnerability to interest rate fluctuations and rising prices, albeit at a slower pace.

On a positive note, the Monetary Policy Committee (MPC) reduced the interest rate by 25 basis points in January 2025. Given moderate inflation, sluggish growth in Q4 2024, an improved and stable electricity supply, and sustained positive market sentiment, the South African Reserve Bank (SARB) may consider further rate cuts in 2025 if inflation expectations remain steady in the first half of the year. Additional rate reductions throughout 2025 could relieve financial pressure on consumers and stimulate medium-term demand.

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More Coverage

Budget Speech 2025

A Balancing Act
Much has happened in the last twelve months as well as the last month since the postponement of the February 2025’s budget. The big talking point and “bone of contention” was the mooted 2% increase in VAT. This increase was met with fierce resistance and made “balancing the budget” quite difficult, as the government has to decide between increasing taxes of cutting expenditures, leaving the Government of National Unity (GNU) between a “rock and a hard place” as it currently stands. The increase in VAT or other taxes sprout from the various expenditure items the government announced or want to implement which among other things include the National Health Insurance (NHI), a transformation fund and continuation of the Covid-19 relief grant and the possible introduction of a Basic Income Grant (BIG).

A View on Company Profits

2024 Q4
Company profitability is vital for investors and the government. In South Africa, the Gross Operating Surplus (GOS) indicates positive growth, with profits surpassing inflation in late 2024. Notable gains in the Agricultural sector (68.8%) contrast with modest growth in Mining and Personal Services, reflecting an optimistic economic outlook post-election.

A Sticky Affair

The South African Budget Speech Postponement
The Laffer Curve is an economic theory that describes the relationship between tax rates and tax revenue. Proposed by economist Arthur Laffer, the curve suggests that there is an optimal tax rate that maximizes government revenue without discouraging productivity, investment, and economic growth. The central idea is that increasing tax rates beyond a certain threshold can lead to diminishing returns; higher taxes may disincentivize work, entrepreneurship, and investment, ultimately reducing the overall tax base.

GDP, Economic Growth and Inflation

2024 Q4
The South African economy showed resilience with a 0.6% growth in the fourth quarter of 2024, despite challenges. Key sectors like Agriculture and Finance thrived, and improved consumer demand signals optimism for 2025. With continued market confidence and government reforms, there is potential for significant economic advancement ahead.

Private Sector Credit Extension (PSCE)

January 2025
In January 2025, credit demand rose by 4.6%, exceeding expectations, although overall demand is still modest. Interest rate cuts are expected to enhance property and asset purchases as disposable incomes improve. As consumers increasingly rely on credit, overall demand for goods and fixed assets is poised to rise throughout 2025
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