Inflation expectations almost at four-year low

Inflation expectations have decreased to an almost four-year low with a broad-based decline inked by survey respondents, giving the South African Reserve Bank more leeway to continue with easing the inflation cycle.

The results of the inflation expectations survey are one of many factors the Monetary Policy Committee (MPC) of the South African Reserve Bank (Sarb) considers when it decides on the repo rate at its meeting every second month.

The Sarb commissioned the Bureau for Economic Research (BER) in 2001 to conduct a quarterly survey to measure inflation expectations and other macro-economic variables related to inflation. The survey covers four social groups: analysts, business people, senior representatives of trade unions and households.

These four groups are used as each group has a different perspective and impact on inflation. Business people, for example, affect prices in the real economy, while analysts affect financial markets. Trade union representatives and households (in their role as employees) affect wage increases, which in turn have a big impact on inflation.

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Inflation expectations decreased across the board

In the survey for the second quarter, inflation expectations of all three social groups, business people, trade union representatives and analysts decreased, with the downward adjustment extending across the forecast horizon.

On average, the respondents expect that headline consumer inflation will be 3.9% during 2025, then increase gradually to 4.3% in 2026 and to 4.5% in 2027. The BER points out that they still expected 4.4% for 2025, 4.6% for 2026 and 4.7% in 2027 in the first quarter survey.

It is the first time in more than four years that expectations for the current year have fallen below 4%. The BER says this downward revision was done as reported annual consumer inflation fell from 3.0% in December 2024 to 2.8% in April 2025.

Regarding their five-year ahead inflation expectations, all social groups made a downward revision and on average, they now expect a rate of 4.4%, which is 0.3 percentage points lower than before.

The inflation expectations of households for the next 12 months decreased to 5.4% from 5.7% before, the lowest rate since the fourth quarter of 2021. The expectation of households for the next five years also decreased from 9.1% to 8.5%.

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Lower inflation expectations, higher wage expectations

In contrast to their view on lower consumer inflation, the survey respondents also revised their forecast of wage increases during the second quarter upward and now expect salaries to increase by 4.9% this year and 5.1% next year, compared to 4.5% for 2025 and 4.8% for 2026 previously.

However, the optimism of all three social groups does not extend to economic growth, with all three groups now more pessimistic about the economy. On average, they expect gross domestic product (GDP) to expand by 0.9% this year, compared to 1.2% before. For 2026, they anticipate growth of 1.2%, lower than the 1.4% expected during the first quarter.

The BER says the MPC will be concerned if inflation expectations increase, are significantly above the midpoint of the inflation target range of 3% to 6% or if the other inflation indicators deteriorate.

“Increasing inflation expectations may, for example, lead to higher wage demands as workers feel they must be compensated for the higher expected inflation in the future. Businesses may also adjust their price increases upwards if demand is robust enough.

“To prevent higher expectations from becoming a reality, the Sarb may be forced to increase the repo rate. The opposite happens if inflation expectations and other indicators decrease.”

The 2025 second quarter survey of financial analysts, business executives and representatives of the trade union movement was conducted between 19 May and 5 June 2025 and the results were computed on 6 June 2025.