The latest inflation expectations survey from the Bureau for Economic Research (BER) shows that analysts, businesses and trade unions expect better salaries to be paid in 2024 – all while anticipating a steady decline in inflation.

The latest survey’s findings are a double boon for hard-hit consumers, as the lower inflation expectations should further solidify a more positive rates decision from the South African Reserve Bank (SARB) later in September and also indicate an easing of price pressure on households.

According to the BER, the average headline CPI inflation expectations of analysts, business people and trade unions seemingly peaked in the second quarter of 2023, as expectations declined significantly in the third quarter.

It was also the first drop in average 2023 expectations in two years, it noted.

“Lower expectations were also evident over the entire forecast horizon (2023 to 2025) and mostly due to downward revisions by business people and trade unionists. Analysts were the exception; they virtually retained their forecast for the second quarter,” the BER said.

The downward revisions in inflation expectations come against the background where headline inflation dropped from 6.3% in May to 4.7% in July.

Average five-year inflation expectations continued to tick down, reaching 5.1% in the third quarter, from a peak of 5.6% in the second quarter of 2022.

The one-year-ahead inflation expectations of households subsided from a recent peak of 8.1% in the second quarter, to 7.0% in the third quarter. Their 5-year expectations declined from 10.7% to 9.8%.

Not only are inflation expectations improving, but respondents are also more optimistic about the state of the economy. During the third quarter of 2023, the survey respondents, on average, forecasted economic growth to be 0.8% in 2023, before rising to 1.4% in 2024.

“This forecast is slightly more optimistic for this year, though similar for next year, compared to the second quarter,” the BER said.

Salaries and wages

On average, the three social groups expect salaries and wages to increase by 5% in 2023, and to then gain momentum to 5.4% in 2024.

Previously, they expected 5% for both years.

Of the three social groups, business people are the most bullish on 2023 salary increases, pushing up expectations from 5.2% in Q2 to 5.4% in Q3. Unions are also more optimistic, anticipating 4.8% in Q3 versus 4.6% in Q2.

Analysts again are the exception, with 2023 salary expectations dropping from 5.2% in Q2 to 4.8% in Q3.

For 2024, however, all three groups revised their expectations higher, from 5.2%, 4.6% and 5.2% in Q2 to 5.5%, 5.2% and 5.4%, respectively.

While the prospects for 2024 are a significant improvement, the 5.0% salary growth expectations for 2023 are still muted compared to the Q1 forecast of 5.4%.

Interest rates

While salary growth expectations are tempered, the expectation that headline inflation will track downward is good news for interest rates.

The BER Inflation Expectations Survey is one of the market surveys commissioned by the SARB to measure key variables related to inflation.

Rising inflation over the last two years has been the main driving force behind interest rate hikes since November 2021, and the Reserve Bank has maintained that the only thing that would stop the cycle is a sustained path of disinflation towards its target range of 3% to 6%.

The SARB’s Monetary Policy Committee would be worried if the survey results showed key stakeholders expecting higher inflation, and this would factor into any decision to hike rates further.

However, with the survey showing the opposite trend, the latest results should further cement the bank’s most recent position to hold rates.

According to economists at Nedbank, the cumulative 475-basis-points rise in interest rates is taking its toll on the local economy and is keeping both business and consumer confidence subdued.

Even with a weaker rand, more load shedding and inflation risks ahead (thanks to rising fuel prices and the knock-on effects), the Reserve Bank should keep the impact of the current cycle in mind when it meets next at the end of September.