Fuel hike to seep into consumer inflation - economists

Cape Town – The fuel hike will most certainly impact consumer inflation, several economists have said.

Last week the Department of Energy announced fuel hikes, including an increase of 82 cents per litre in both grades of petrol.

Four economists shared with Fin24 how this is likely to impact consumers' pockets.

Wessel Lemmer, ABSA senior agricultural economist, said the cost of crops such as potatoes may be impacted. “The latest price hikes for fuel, including diesel, will particularly increase the production and harvesting costs for those crops in season during winter.”

Intensive crops like vegetables and potatoes will be “more severely” affected than other agricultural commodities.

Delivery costs of agricultural commodities and the cost to distribute food will also increase.

“An additional impact that seems overlooked is that the cost of crude oil correlates with that of nitrogen, which is a key fertiliser component.

“Producers start to prepare their fields during August for the next summer grain production season to be harvested from next year May 2019. An increase in fertiliser costs can be expected, if the current price of crude oil stays high for 2018.”

Lemmer explained that based on crude oil prices and fertiliser prices for 2017, maize production is at break-even levels for 2018.

“Producers need higher prices for their commodities in 2019 to break even with costs based at the increased prices in 2018 (for) when they start to produce the next crop year (in 2019).”

Paul Makube, senior agricultural economist at FNB Agri-Business, also expressed views that record high petrol prices could impact costs in the agricultural sector.

“It is estimated that a R1/l increase in fuel costs equates to a R1bn increase in input costs per year to the agriculture sector. These costs manifest differently across the various industries from planting, harvesting, distribution and packaging.”

With the summer season having ended, current agricultural activity in the Western Cape for example could cost an additional R153m.

Makube added that the increased distribution costs would feed through to consumers. He noted inflation was slightly higher in April at 4.5%, but still within the Reserve Bank's target band of 3% to 6%.

With interest rates unchanged at 6.5%, Makube expects there won’t be any reprieve for consumers for the remainder of the year if current developments continue in the low growth environment.

“We still expect the robust agriculture output for the 2017/18 season coupled with huge carry over grain stocks to continue to provide some cushion for consumers in the short to medium term.

"Reports that major crude oil producers such as Saudi Arabia and Russia will boost output should help exert downward pressure on oil prices and possibly halt further increases at the pump,” Makube said.

Momentum Investments economist Sanisha Packirisamy pointed out that the petrol price increases will have a direct impact on transport. “Fuel has a weighting of 4.58% in the headline inflation basket. Higher fuel prices can also affect inflation indirectly through second-round impacts.

“If firms spend more on transporting their goods, they can upwardly adjust the final price of goods and pass on the additional price pressure to the consumer,” she explained.

Higher inflation pressures mean consumers will have less purchasing power. But Momentum Investment expects inflation to remain within the target band.

“Consumer confidence posted an upbeat print for the first quarter of the year, banks are loosening credit conditions and wealth effects have been positive. These factors have all contributed to a favourable outlook for consumer spend,” she said.

However, if geopolitical tensions intensify and possibly impact oil supply negatively, this could result in higher oil prices. This could threaten the inflation outlook and impact household spend.

Investec chief economist Annabel Bishop said the sustained petrol increases will impact consumer goods prices, creating second-round inflationary effects which the South African Reserve Bank will be looking out for. This can have an impact on interest rates.

“Another large petrol price hike of 72c/l is currently building for July,” Bishop said.

If petrol price pressures persist into the third quarter of the year, this could eradicate the chances of an interest rate cut, she said. “The high petrol price will weigh negatively on consumer sentiment going forward and increasingly divert expenditure from retail to fuel costs,” she warned.

Bishop added that the GDP figures for the first quarter, which show the economy declined by 2.2%, are just a one-off print and not likely the beginning of a recession.

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