South Africa's June inflation rate rose to 5.0% from 4.5% in May, supporting the case for a 25-basis-point interest rate hike from the South African Reserve Bank (SARB) tomorrow as consumer inflation is well above the central bank’s target of 3.0%.

The main driver was transport, which surged to 12.7% in June from 9.4% in May. That in turn reflected high domestic fuel prices, which in turn reflected high global oil prices.

Other items rose more modestly, with housing and utilities inflation, for example, rising to 5.5% in June from 5.3% in May, and insurance and financial services rising to 5.9% in June from 5.7% in May.

The importance of the oil price in driving up the inflation number can best be read in the core inflation figure, which excludes energy (and food prices). The core reading showed an increase of 4.1% in June from 3.8% in May, in line with The Common Sense’s estimate.

The June inflation readings reinforce The Common Sense's assigned probability of 65.0% for a 25-basis-point hike by the SARB when its Monetary Policy Committee meets tomorrow, taking the repo rate to 7.25%, with the remaining 35.0% probability assigned to a hold.

Bheki Mahlobo, the in-house economist at The Common Sense, said the SARB is confronting inflation pressures at home alongside tight monetary conditions abroad.

The June inflation numbers reflected the June fuel price, which was still based on an oil price of near $100. South Africa adjusts its fuel prices on the first Wednesday of every month, and hence the June price still reflected the high oil prices of May.

Looking ahead, July's inflation data may ease to nearer 4% on the headline number because it will reflect a 7.2% drop in South Africa's petrol price that was announced on 1 July and will not yet reflect the effects of the now once again elevated oil price.

The oil price is again elevated as renewed strikes in Iran have caused the price of Brent crude to rise from $72.10 per barrel at the beginning of July to $93.80 this morning.

Inflation expectations from analysts, households, and businesses, which the SARB uses to help forecast where inflation is heading and to judge whether businesses and households will push prices and wages up in anticipation, also remain above the central bank's target.

Testimony by the chair of the Federal Reserve (the American central bank), Kevin Warsh, to Congress last week emphasised that United States (US) inflation remains well above the Fed's 2.0% target and described economic activity and the labour market as strong, while highlighting the extent of investment in artificial intelligence. A strong US economy mitigates against the possibility of a rate cut because policymakers would not think that the economy needs interest rate support. Warsh warned that easing US inflation in June did not justify a pivot away from the hawkish stance of the Fed.

In the face of a possible US interest rate hike the SARB really has very little room to avoid hiking local interest rates.