Economists are pessimistic as inflation wreaks havoc for consumers

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Stats SA said inflation increased by 0.1% month-on-month in May from 4.4% in April. Photo: Supplied
Stats SA said inflation increased by 0.1% month-on-month in May from 4.4% in April. Photo: Supplied

BUSINESS


Headline consumer price inflation (CPI) reached five-year highs in May. Driven by food and fuel prices, it went up well beyond expectations and beyond the SA Reserve Bank target surging to 6.5% last month from 5.9% in April.

The Reserve Bank’s inflation target range is between 3% and 6%. This latest increase will likely see it increase interest rates again next month.

Dawie Roodt, chief economist at Efficient Group, said the Reserve Bank had no option but to increase interest rates to reduce inflation levels.

“This is a bad number because it’s much higher than expected and it’s clear the Reserve Bank will continue tightening monetary policy, and I think the next move will be a 50 basis points increase after the July [monetary policy committee] meeting, and they will increase by another 50 basis points in the meeting after that as well.”

READ: Is government lying about the real inflation rate?

He said inflation expectations were also on the rise:

The Reserve Bank is trying to get us to borrow less money and to spend less money and save more. It is trying to squash inflation out of the economy, and they do that by making money more expensive, forcing us to take the pain of lowering inflation.

Roodt added that government was not willing to make hard decisions that were not politically correct to bring inflation down, such as putting less money into entities like Eskom and allocating money for public servants’ salaries, who, according to him, were already highly paid.

“Before we can invest in fixed-capital formation, we need to save and we don’t have sufficient savings as a country, so higher interest rates will encourage people to save more. The biggest reason we have a low savings rate is that the state is borrowing long-term money to borrow on short-term current expenditure.”

Government can do more but won’t

“The state is a destroyer of savings in South Africa. We can only get inflation lower in the country by getting the state to spend less on current expenditure and save more,” he said.

READ: Why the cost of living is not a problem

Independent economist Elize Kruger said government could ease the increased cost of living burden on consumers by cutting down increases in administered prices. Electricity prices are expected to increase by double digits next month, putting a further squeeze on consumers.

“Government has control of prices for things like electricity, water, assessment fees, toll road fees – all these have an important bearing on our inflation rate. And if you look at these administered price increases, they are generally quite high. In May, administered prices were 14.4% higher than a year ago, so government should look at corruption and all those factors that tend to inflate prices of the services it controls.”

According to the central energy fund website, based on Tuesday’s prices, a litre of 95-octane unleaded petrol will go up by almost R2, while a litre of 93-octane petrol will increase by R1.73, and a litre of diesel and a litre of illuminated paraffin will increase by R1.60 and R1.77, respectively.

READ: Beware a deregulated fuel price

South African households are already struggling to put food on the table, but the spike in inflation means things will get even tougher. Higher inflation was driven by massive increases in food and non-alcoholic beverages, which went up by a shocking 7.6% last month when compared with the same period last year, contributing 1.3 percentage points to the overall CPI number. Transport costs shot up 15.7% year on year, contributing 2.1 percentage points.

Kruger said that food price inflation was the biggest shocker in Wednesday’s inflation number:

It increased monthly by 2.2% and annually, it went up by almost 8%. Looking at the composition of the basket for food items is quite concerning as bread and cereal, the staple food for many South Africans, increased by a hefty 3.4% in the month and about 8.4% annualised.

“If you look at meat, which is the biggest item in terms of weighting, it increased by about 9.4% on an annual basis. So, this means there will be down-trading to cheaper meats and food items. There will be changes in consumer trends and habits as a result of these increases.”

‘Social upheaval just needs a spark’

Investec’s chief economist Annabel Bishop said:

Despite producing enough food to have high food security, South Africa is a price taker for most of its agricultural food produced, either through import or export parity pricing, which means international food prices are a key driver of local food costs. The economist commodity price index recorded a 19.4% year-on-year lift for the prices of global food agricultural commodities.

“Increased protectionism (including outright bans by some countries on certain exports), along with increased sanctions on Russia and the impact of the Chinese lockdown restrictions, have driven already high global food prices before Russia’s [invasion of] Ukraine war (including adverse weather conditions and increased demand) even higher this year,” she said.

Higher interest rates are the enemy of consumption and economic growth. Economists say the elevated inflation levels and higher interest rates will result in lower economic growth as we will be forced to spend less.

This in a country that’s desperate for growth and jobs.

Roodt added: “We have very high levels of unemployment and poverty, and now with the increased food prices, this is a recipe for disaster. We just need a spark and there’ll be social upheaval in this country.”


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