Inflation hits five-year high

PwC economist Dr Christie Viljoin says inflation has definitely accelerated. ‘It will be there for a bit still, so it’s not good news for South African consumers.’

FIFI PETERS: A major talking point for the economy today was the inflation report that came out from Statistics South Africa a little earlier. I looked at that report and it showed that the price of meat had risen 8% year on year in December, and the price of oil had surged over 20% in the same period. In fact, that’s a consumer inflation report for December showing that the price of practically everything has increased.

To help us better understand what is driving prices in this country higher, and how long it’s going to last, I am joined by Dr Christie Viljoen, an economist at PwC. Christie, thanks so much for your time. I guess this print suggests that we will need to fasten our belts even tighter, but the question is for how long?

DR CHRISTIE VILJOEN: Well, yes, inflation has been climbing for quite a bit, broadly through the second half of last year. We know that the numbers were like 3%, 4% not too long ago. Now we’re up to about 5%, closer to 6%. It is quite possible that we are going to see these kinds of trips towards [the] six number for quite a few more months. I don’t think that’s permanent. We have to remember that the Reserve Bank has done a lot of positive work to get inflation and inflation expectations towards that middle of the target range, that 4.5% level. I’m quite sure that it’ll return there, but not immediately. We have the pressure now from oil prices going up globally, and locally we’ve got the food-price pressures. So for the moment definitely inflation has accelerated; it will be there for a bit still. So it it’s not good news for South African consumers, most certainly not.

FIFI PETERS: Adding to that are the price pressures from energy and electricity, and one has to ask what happens if Eskom gets its way and pushes through that 20.5% increase in tariffs. I guess the question then is how worried you think our South African Reserve Bank could be when looking at what inflation is doing presently?

DR CHRISTIE VILJOEN: Yes. We know the electricity price is going to go up. It’s going to probably be substantial. We don’t exactly know what it’s going to be. It could be anywhere between, I think, 5% and 20%, so it’s going to be a big increase again. We know the oil price has climbed this week globally to the highest in seven years because of some issues in the Middle East. So it it’s going up, most certainly.

The Reserve Bank is looking at this. They are at the moment preparing for their interest-rate meeting, which is being held next week. They’re factoring these elements into their forecasts and the forecasts are what they use to determine their interest-rate decisions. Now, the Reserve Bank has warned us for quite some time that interest rates are going up this year, and in November they showed it as going to go up quite substantially, probably at least one percentage point It’s basically because they need to get interest rates back eventually to where they were before Covid-19. So today’s inflation number in itself won’t put pressure on them to increase interest rates faster.

I think the broader dynamic of the energy prices and food prices and maybe pressure on the exchange rate – all of those will feed into the expectations that inflation is going to be a bit more of a problem this year than it was last year. So I think most economists are keeping with their view that interest rates will probably be increasing quite a few times in 2022.

FIFI PETERS: And what’s your view of the number of interest-rate increases that we may see?

DR CHRISTIE VILJOEN: I think if you look at the guidance from the Reserve Bank, it’s probably about five, maybe six, depending on how you tip the numbers. I think that it all depends on how fast the economy is growing. If the economies are growing fast enough, they’ll have to slow that down a bit, so it’s possible that it could be slower, maybe only four adjustments. But the fact is that over the next two to three years there’s going to be a lot of these upward adjustments in interest rates after the Reserve Bank gave us a lot of rate cuts in 2020. It’s part of the process of normalising monetary policy. So it’s actually not a case of how quickly it’s going to happen, but I guess it’s how long they can hold on before lifting it further. To be honest, I think next week they’ll probably continue with this trend of putting interest rates a little bit higher every time.

FIFI PETERS: Just a quick one. I saw that the inflation rate varies across provinces. For instance, I’m seeing that for the likes of the North West and even in the Northern Cape, their consumer inflation is presently sitting over 6%. Why is there this difference?

DR CHRISTIE VILJOEN: Well, we know certain prices will be the same. We know fuel is regulated, electricity is regulated – those kind of services. And then you have certain companies that would, across the country, charge the same price for their goods and services.

Some of the variation could be down to, for example, the cost of fresh food and vegetables, where you might have an oversupply or an undersupply in certain areas. So that’s sort of a normal supply-and-demand situation.

The differences between the provinces are not very big. They could be 0.5, 0.6 percentage points. There’s very seldom a very big difference where someone would really see that there’s a problem in one province compared to another. Where one province is higher in the current situation, it could be that by the middle of this year they could have a lower inflation rate.

So it it’s something that economists aren’t too concerned about. It speaks a bit to [the fact that] we have a large country from a geographic perspective, and when it comes to things like food there is always going to be a little bit of a difference here or there as to the actual price of these items.

FIFI PETERS: All right. Dr Christie, thanks so much for your time. We will leave it there. Dr Christie Viljoen is an economist at PwC, and was helping us break down and understand the consumer inflation print for December.

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