CONSUMER inflation’s sharp spike to 7% last month, its highest level in nearly seven years, shows the Reserve Bank was justified in raising interest rates last week.

It also indicates that more and higher hikes may be on the cards even though the economy is stagnant. Economists have warned that the hikes will push SA closer to recession with growth of less than 1% forecast for the year.

Rates have already been lifted by 50 basis points in January, and by 25 basis points this month. Higher food prices due to a persistent drought, fuel and medical insurance costs drove inflation above the upper end of the 3%-6% target band for the second month in a row.

The Bank is forced to raise rates if inflation breaches this target consistently and it has flagged the weak rand and food prices as risks to the inflation outlook.

"The jump in inflation is substantial and reinforces the Reserve Bank’s hawkish stance on inflation," Rand Merchant Bank fixed income strategist Carmen Nel said.

Nedbank economists project two more interest rate increases of 25 basis points each, while Old Mutual Investment Group senior economist Johann Els forecast one or two more rate hikes of 25 basis points, as "the economy could not handle more than these rate hikes".

The effect of the drought on food prices was yet to reflect on the prices consumers see on the shelves, Grain SA economist Wandile Sihlobo said. "More importantly, up until the middle of next year, bread and cereal prices will remain high and additional price hikes on meat, dairy products and vegetables will come into effect."

Data out on Wednesday showed the economy added only 43,000 formal jobs in the fourth quarter of last year, with the outlook for employment expected to be depressed in line with the economic growth slowdown.