Fuel price threat to inflation

2011-01-08 11:38

You are unlikely to pay a lot more for your living expenses this year, despite the large fuel price hike this week, economists have said.

But they warned that the rand, ­rising global food prices and ­administered prices posed a risk to the local inflation outlook. This, however, may not cause prices to spiral out of control beyond the 3% to 6% Reserve Bank target range.

Investec economist Annabel Bishop said: “Should another one of the over-indebted advanced economies ­become bankrupt, particularly the very large economies of Spain or Italy, the heightened levels of international risk aversion could cause a sudden, sharp but prolonged weakening in the rand.”

Her warning was reiterated by Nedbank economist Isaac ­Matshego, who warned that if the rand dropped below R8 against the US dollar and the oil price went above $100 a barrel over a ­prolonged period, inflation could spring out of the target range. The rand has strengthened to about R6.72 against the dollar, the strongest it’s been in three years.

The country’s targeted consumer price index (CPI) accelerated to 3.6% year-on-year last November after climbing to 3.4% in October.

But Bishop projected CPI to ­average 4.2% this year and 5.2% next year. Matshego forecast CPI to average 4.6% this year, but his projection would largely depend on the movement of the rand and food prices.

Chris Malekane, head of labour federation the Congress of SA Trade Unions’s policy unit, said that this week’s fuel price ­increase would slow the rate at which inflation has been falling and might even dampen economic growth, which would curtail job creation. He warned that fuel prices would hike transport and production costs, thereby weakening the ­recovery of the SA economy.

“The fuel price increase is going to feed into the prices of other products like food. In my view, as long as the economy is in the doldrums, the Reserve Bank will keep interest rates ­unchanged for a while. The price hike has reduced the chances of further interest rate cuts by the ­Reserve Bank.”

The central bank’s monetary policy committee, which decides on interest rates, is expected to meet between January 18 and 20.

To underline the threat posed by rising oil prices, Fatih Birol, an ­International Energy Agency (IEA) economist, said oil prices have risen to dangerous levels that could derail a global economic ­recovery. Oil is trading at around $94 a barrel, close to the levels that partly triggered the global financial crisis. South Africa should be concerned as its recovery was still fragile, she said.

Birol was quoted by the Financial Times as saying that oil- ­producing countries should boost output to prevent a surge in prices.

Citing an IEA analysis, the ­Financial Times reported that over the past year the oil import costs for the 34 industrialised nations that make up the Organisation for Economic Co-operation and ­Development (OECD) had risen by $200 billion to $790 billion at the end of last year.

The Financial Times reported that this increase in the oil import bill equals about 0.5% of OECD gross domestic product.

Matshego said that the petrol price increase would add 0.1% to ­January CPI figures. He added that if the knock-on effects of the hike on transport and food costs were taken into ­account, the impact could be ­greater than 0.1%.

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