South Africa’s annual consumer price inflation increased to 4.5% in September, from 4.4% in August, according to figures released by Statistics South Africa (Stats SA) this morning. The increase was driven principally by higher fuel prices.

Transport inflation rose from 8.8% in August to 10.8% in September year on year, while fuel inflation accelerated from 20.0% to 27.9% over the same period. The sharp increase in fuel prices is the principal source of renewed inflationary pressure in the economy.

Higher diesel prices are particularly concerning. Diesel is now trading at 149.0% of its 10-year South African inflation-adjusted average. Because diesel is extensively used in agriculture, mining, manufacturing, and freight transport, sustained increases in its price raise costs throughout the economy and create the risk of further inflationary pressure.

Core inflation, which excludes food, non-alcoholic beverages, fuel, and energy, eased from 4.1% in August to 4.0% in September year on year. Although core inflation eased, both it and the headline inflation figure is above the South African Reserve Bank (SARB) inflation target of 3%.

The Common Sense's in-house economist Bheki Mahlobo expects inflation to rise further in October, following another round of substantial fuel price increases. He said the sharp increases in petrol and diesel prices during September and October would place additional upward pressure on headline inflation, potentially pushing it past 5.0%. Mahlobo expects higher fuel costs to strengthen the case for the SARB to raise interest rates by 25 basis points at its November meeting, taking the repo rate to 7.5%.

Such an increase would signal the Reserve Bank’s determination to contain inflationary pressures and maintain confidence in its 3.0% inflation target, even as higher borrowing costs place additional pressure on households and businesses.

The inflation release also coincides with Finance Minister Enoch Godongwana’s Medium-Term Budget Policy Statement today. The Common Sense expects the statement to demonstrate continued fiscal discipline despite weaker economic growth.

If these expectations prove correct, the combination of fiscal restraint from the National Treasury and monetary discipline from the Reserve Bank will provide two important signals of fiscal and monetary prudence at a politically uncertain time in South Africa.