In our article published in October 2017, which forecast the South African salary increase for 2018 -http://www.axiomatic.co.za/news/salary-increases-for-2018/, we stated that the general market salary increase would be between 6.0% and 6.5%. However, we did caution that the final increase would depend to a large extent on the trajectory of inflation and the exchange rate over the final months of the calendar year. Further, we also stated that it was too early to definitively decide on the salary increase and that we would provide regular updates.
The February 2018 CPI was published at 4.0%, which was lower than January’s 4.4% reading. Inflation has surprised to the downside in recent months, however, to establish whether this low level of price increases is sustainable, one needs to examine the various components included in the inflation basket.
In February 2018:
- Goods inflation decreased to 4.9% primarily on the back of the strengthening rand;
- Services inflation fell to 4.9% from 5.1% the previous month. What was encouraging is that medical inflation decreased to 8.5% in 2018 from 10.2% in 2017 – the annual medical survey results were included in February;
- Food inflation dropped propitiously from 4.6% in January 2018 to 4.0% largely due to decreases in meat prices;
- Transport inflation decreased to 3.2% from 4.4% the previous month because of the reduction in the petrol price.
PROJECTED INFLATION RATE
The above factors bode well for inflation going forward and while we do foresee this being the bottom of the current inflation trajectory, we are now predicting inflation to average 4.6% in the calendar year 2018. Cognisance must also be taken of the fact that the VAT increase will filter into CPI in April 2018 but we anticipate that this will have limited impact on inflation.
Companies which are now granting increases, need to take cognisance of the fact that the average annual inflation for the period April 2018 to March 2019 is expected to be 4.8%.
Our projections are shown in the table below:
As can be appreciated by examining the chart alongside, the currency has appreciated dramatically since early November 2017 when it was trading at 14.25 to the current rate of 11.95 to the US dollar. The salient reason for the strength of the local currency was the positive outcome of the ANC elections in December 2017 and the general weak dollar. Our forecast is for limited depreciation during 2018.
Axiomatic’ s October 2017 article stated that real salary increases in 2018 would be restricted to an increase of 1.0% in 2018. Therefore, the formula for revised projected salary increases determines the following outcome:
Projected inflation 2018:
4.6% + real salary increases 1.0% = projected salary increases for 2018 = 5.6%.
Projected inflation for the period April 2018 to March 2019:
4.8% + real salary increases 1.0% = projected salary increases for the period = 5.8%.