Inflation increased slightly in March, with headline inflation rising only 3.2% in March on a year-on-year basis – still comfortably near the lower end of the South African Reserve Bank (Sarb) inflation target of between 3% and 6%.
However, expectations are that consumer prices are already increasing and the official inflation figures will catch up to the rising prices within the next few months.
The fact is that the prices of several essential products that are set by government have increased significantly, but this is not reflected in the latest inflation figures.
The first of these administered prices to come to mind is the just-below R1 increase in the price of petrol – up 5.5% compared with March – effective from the beginning of April.
That the inland price of R17.10 per litre of petrol is 24% higher than in April a year ago indicates that the next inflation figure will not look very pretty when it is announced by Statistics SA towards the end of May.
Unfortunately, a sharp increase in petrol prices has a knock-on effect on the prices of most products, either due to higher transport and production costs or as a proxy for the higher prices of other raw products, such as chemicals.
A sharp increase in the price of electricity is the second of the administered prices that will add to inflationary pressures.
Once again, electricity is an important input in the production and distribution of goods and services, and will make these all more expensive. This is in addition to being an essential product that consumers use.
The economists at Momentum Investments point out that the recent increase in electricity has not worked its way into consumer price inflation yet.
“Eskom’s 15.63% increase in electricity tariffs to ‘direct purchasing’ clients [came] into force only on April 1.
“Most households will experience electricity and water tariff increases when municipalities pass it on to them. This increase will show up in July and August’s CPI [consumer price index] statistics,” according to a commentary issued by Momentum Investments.
The note, written by Herman van Papendorp, Johann van Tonder and Sanisha Packirisamy, concludes that inflation will probably increase to more than 5% within the next few months.
They list several categories of products that are expected to show continued price increases.
“Lockdown kept education and housing inflation low, but fuel and administered prices are rising. Food prices on average increased by 5.9% year on year in March, up from 5.4% in February.
“Food price increases continue to be dominated by increases in the prices of bread and cereals, and of meat.
“Meat prices are still affected by the drought, which had a negative effect on supply and may continue to increase on a month-on-month basis. Prices of vegetable oils and fats continued to increase in double digits (13.4% compared to 10.6% in February) due to among others, an international supply shortage in vegetable oil products,” notes Momentum.
The economists make an interesting point about the cost of education.
While recognising that education inflation was the lowest in 30 years, they expect renewed price increases as the Covid-19 situation returns to normal.
Read: Education inflation (Feb 14)
“The total education price index rose by 4% year on year, which is lower than the 6.4% increase of last year. The lower education inflation rate is the result of smaller increases in primary and secondary school fees for 2021.
“This can be ascribed to these schools on average accumulating surpluses in 2020 due to smaller than budgeted outlays on, for instance, water and electricity services (due to Covid-19- and lockdown-driven school closures), as well as the provision of ‘digital education’ for an extended period.
“Costs were also less than budgeted due to the suspension of extramural activities (such as sport and culture). These surpluses made lower fee increases for 2021 possible.
“However, although primary and secondary school fee inflation was lower compared to previous years, total education inflation still exceeded headline CPI.
“One of the main causes of above-average school fee inflation is the ongoing steep increases in water and electricity tariffs they have to pay.
“As learners are back at school and normal activities resume, school CPI for the 2022 year is likely to increase again,” according to Momentum’s team.
A look at the figures in the Stats SA report indicates that the weekly trip to the supermarket is becoming expensive. At 6%, food prices are rising by nearly double the overall inflation rate, with meat (6.6% more expensive than a year ago ), fish (6.8%) and milks, eggs and cheese (7.2%) all increasing significantly.
Selected categories driving inflation
|Oils and fat||13.4|
|Sugar, sweets and desserts||7.4|
|Milk, eggs and cheese||7.2|
|Private transport running costs||7.0|
|Electricity and other fuel||6.0|
|Water and other services||5.9|
Source: Stats SA
The economics team at FNB notes in a commentary that the increase in inflation in March was widely expected.
“It should, however, peak in May at a rate not higher than 5.1% before steadily moderating in the second half of the year,” according to a note published by Mamello Matikinca-Ngwenya, Siphamandla Mkhwanazi and Thanda Sithole.
“In other words, this upward trend in consumer inflation is a temporary phenomenon and thus should not be destructive to economic activity. As usual, the Sarb should look beyond this temporary event and allow monetary policy to remain highly accommodative at least for the next 12 to 15 months.”
Nedbank expects inflation to be somewhat higher this year at an average of 4.6%. It also predicts that interest rates will remain unchanged and rise only in 2022.
Wild card … and the oil price
The exchange rate is, as always, the wild card when it comes predicting inflation.
And then there is the unpredictable oil price that can make the forecasting of any price in SA difficult.
Momentum Investments notes that international oil prices continued their upward trend recently due to higher demand worldwide as economies opened up. The price of Brent Crude is almost 190% higher than a year ago, warns its economists.
“Fortunately, the rand was around 20% stronger than a year ago, preventing even steeper fuel price increases. As it is, though, fuel prices were on average 2.3% higher year on year in March,” they say, adding that the Reserve Bank’s monetary policy committee’s forward-looking bias would be concerned with the second-round effects of increases in fuel and electricity prices.
Stats SA notes in its commentary to the inflation figures that this was the first time in 12 months that fuel prices had increased on an annual basis – in other words, for the first time in a year, motorists were paying more for fuel in March than a year ago. In February, they were still paying less than in February 2020, as was the case in other months.
The inflation figures also show that other costs related to transport have increased sharply compared to a year ago. Running costs of private vehicles, excluding fuel, have increased by 7%.
In addition, people are travelling much more this year than last year, adding to monthly expenditures and any household’s unique ‘inflation rate’.
Listen to Nompu Siziba’s interview with RMB economist Siobhan Redford (or read the transcript here):