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Annual inflation in South Africa eased to 4.3% in July, from 5.0% in June. This is according to the latest Consumer Price Index report from Statistics South Africa.

The softer July headline inflation reading is off the back of a roughly R2 a litre petrol price cut on 1 July. This led to annual fuel inflation easing to 20.6% in July from 26.0% in June, and annual transportation inflation easing to 8.9% from 12.7%.

However, the core inflation figure, which is a measure that excludes food and energy items, rose to 4.2% in July from 4.1% in June, signalling that underlying price pressures remain elevated.

Although headline inflation has eased, both it and the core inflation reading remain well above the 3% target of the South African Reserve Bank (SARB), meaning that South African interest rates are likely to rise by 25 basis points, taking them to 7.25% before the end of 2026.

The in-house economist at The Common Sense, Bheki Mahlobo, said, “It is important to explain why core inflation would be holding even as headline inflation is falling.

“The answer is stickiness. Broader costs that spiked when oil prices spiked are not coming down at the same rate as oil did at the end of June. Remember that the July inflation data reflects June oil prices, given the lag in South Africa’s petrol price adjustment.”

Mahlobo added that the core number is important now, especially when read against the uncertainty on Iran, which has led to oil prices holding near $90 per barrel.

Furthermore, the SARB will consider domestic price pressures alongside external factors to determine South Africa’s monetary policy. The United States (US) Federal Reserve (the American central bank, also known as the Fed), under its new chair Kevin Warsh, intends to anchor US inflation towards its target of 2%, meaning that US interest rates will likely move higher towards the end of 2026.

Higher US rates will add pressure on the rand, as US assets become more attractive to global investors. This leads to capital moving away from emerging markets such as South Africa. Mahlobo said this would have factored at the SARB’s Monetary Policy Committee (MPC) meeting which voted four to two to hold interest rates – something the market and all good economists interpreted as a serious mistake. The mistake led the rand to weaken by nearly 3% on that announcement, leaving the bank with almost no wiggle room to avoid hiking at its next MPC meeting. Mahlobo said the SARB will be more cautious as a result, and will look to restore the credibility dented by its July meeting when it meets again in September.

Almost the strongest indicator of what lies in store for rates is what is happening in the American bond markets. Yields on American government bonds have risen to a 19-year high. Yields rise as bond prices and investors drop bonds when they anticipate a rise in interest rates.

A chart of the amazing yield picture in the American bond market is shown below.

Mahlobo said, “There's something extraordinary going on in the US bond market, beyond just the question of interest rates. The demand for AI debt from hyper-borrowers who are paying premiums on their debt are crowding out the traditional government bond market, which has contributed to the soaring US yields.”