Macroeconomic Drivers of Inflation in South Africa: A Contemporary Analysis

Inflation serves as a barometer of economic pressures. As recovery gives way to mounting global disruptions, South Africa’s inflation trajectory reveals a rapidly shifting economic reality, reflecting the growing influence of global volatility on domestic prices. Here are the key drivers of inflation in South Africa from 2020 through 2026.

What is Inflation?

Inflation is a general increase in the prices of goods and services over a given period of time, resulting in a decline in the purchasing power of money. In South Africa’s open economy, inflation is measured using the Consumer Price Index (CPI), which analyses the changes in the average price level of a basket of goods and services.

Lindiwe Ayanda Khumalo, Chairperson of Rethinking Economics for Africa (REFA) UJ (2025-2026) and the current Head of Research in Economics and Development at African Minds for Applied Research Institute ( AMARI) highlights a commonly misunderstood aspect of inflation in an open economy such as South Africa, offering a clearer explanation of how Consumer Price Index (CPI) changes should be interpreted.

She explains that many people wrongly assume that when CPI increases, all goods and services become more expensive at the same time. This is reflected in her point that CPI changes “do not mean that every single good is affected at the same time.” This clarifies that inflation represents a general trend in prices, rather than uniform price increases across all goods.

She further explains that price changes are not driven by inflation alone, but also by specific market and global factors. For example, oil prices can rise due to geopolitical tensions such as conflict involving the USA and Iran, with oil surpassing $100 per barrel. This demonstrates that some price increases are driven by external shocks affecting specific goods rather than overall inflation.

Inflation does not arise from a single source in the economy, but from various underlying forces that drive how prices move over time. Globally, economies primarily experience two forms of inflation: demand-pull inflation and cost-push inflation. These two forms of inflation help explain the different forces behind rising price levels in an economy.

2 Types of Inflation

Globally, economies primarily experience two forms of inflation:

• Demand-pull inflation occurs when aggregate demand for goods and services exceeds aggregate supply, often described as “too much money chasing too few goods.” It is typically driven by expansionary fiscal policy, such as increased government expenditure or tax cuts, and expansionary monetary policy, such as lower interest rates, which increase money circulation in the economy.

• Cost-push inflation, on the other hand, arises when the cost of production increases, leading firms to raise prices. This is often triggered by spikes in energy costs due to geopolitical tensions, or increases in food prices resulting from supply shocks such as natural disasters

Inflation Dynamics in South Africa (2020–2026)

2020:

The inflation average rate in South Africa rose from 3.3% in 2020, and suppressed demand during the COVID-19 pandemic.

2021:

It further increased to 4.5% in 2021 as economic activity recovered, signalling early demand-pull pressures. However, domestic supply disruptions, including the July 2021 unrest following the incarceration of former president Jacob Zuma, further intensified inflationary pressures by disrupting supply chains, causing shortages of essential goods, increasing distribution costs, and contributing to rand depreciation.

2022:

Inflation peaked at 6.9% in 2022, driven largely by cost-push inflation, as global supply shocks linked to the Russia-Ukraine War elevated energy cost and food prices, particularly because Russia and Ukraine are key global producers of commodities such as sunflower oil, resulting in higher international prices.

2023:

The average Inflation rate remained elevated at 6.0%.

2024:

Before moderating to 4.4% in 2024, reflecting the impact of monetary tightening by the SARB through higher repo rates, which reduced aggregate demand.

2025:

By 2025, inflation declined further to 3.2%, supported by sustained policy restraint, with CPI readings indicating relatively contained short-term price pressures. However, geopolitical risks remain significant.

2026:

A key concern is the Strait of Hormuz, one of the world’s most critical oil and gas transit routes, located between Iran and the Arabian Peninsula. Recent disruptions have significantly reduced shipping activity, increasing global oil market volatility and tightening energy supply conditions. This has contributed to rising imported inflation in South Africa, as higher energy costs feed into production, and food prices.

As a result, inflationary pressures may exacerbate in 2026, remaining primarily cost-push in nature. In response, monetary authorities may be required to maintain a tight interest rate stance, using the repo rate to contain inflation expectations and preserve price stability within the target framework.

Lindiwe Khumalo offers a measured outlook on South Africa’s economic trajectory; one that balances short-term relief with longer-term pressure. She points to recent fiscal measures under Finance Minister Enoch Godongwana as providing temporary relief to consumers, particularly through fuel price reductions that have eased cost pressures in the short term. This is reflected in her view that “at some point during the year, consumers will have to shoulder the burden of regaining the financial losses during this three- to four-month period,” depending on how long geopolitical tensions persist.

Ms Khumalo emphasizes that inflation management in South Africa cannot be viewed in isolation from global conditions. She explains that inflation targeting, while locally defined, is heavily influenced by global factors, as the South African Reserve Bank closely monitors the behaviour of key trading partners and broader market dynamics. She further notes that before consolidating its inflation framework, the central bank considers indicators such as exchange rate movements and money supply trends.

On policy direction, she expects continuity. She anticipates that the SARB will maintain its 3–6% inflation target, effectively operating with a tighter 3% anchor within a 2–4% tolerance band. She expresses confidence in this framework, “I have confidence in the SARB’s ability to maintain that stability,” she noted.

However, she cautions that this stability involves trade-offs. Ms Khumalo highlights concerns that maintaining inflation control may require sustained higher interest rates, which could limit economic growth. With the economy growing at approximately 1.5–2% and unemployment rising, she points to the ongoing tension between price stability and growth momentum.

Challenges vs Benefits of Inflation

Inflation presents both challenges and benefits. On the negative side, sustained high inflation can lead to hyperinflationary conditions, eroding consumer confidence, discouraging investment, and potentially resulting in business closures and retrenchments.

On the positive side, moderate inflation can benefit debtors, as they repay loans in money with reduced purchasing power, and can improve export competitiveness, making domestic goods relatively cheaper for foreign buyers.

Policy Responses

To combat inflation, policy intervention is required from both fiscal and monetary authorities. The National Treasury can implement a tight fiscal stance by increasing direct taxes (such as personal income tax) and indirect taxes (such as VAT), while reducing government expenditure. The South African Reserve Bank complements this through tight monetary policy, primarily by increasing interest rates via the repo rate, thereby reducing aggregate demand.

Key Takeaway

South Africa’s inflation trajectory from 2020 to 2026 reflects a dynamic interplay between domestic demand, supply-side constraints, and global shocks. While stabilisation policies have brought inflation back toward target, renewed geopolitical tensions are expected to place upward pressure on inflation in 2026.