Fuel and food prices led to inflation’s steady climb in 2021

Inflation kept climbing in 2021, with annual consumer price inflation at 5.9% in December after reaching 5.5% in November 2021. Average consumer inflation for 2021 was 4.5% higher than the averages recorded for 2020, when inflation was 3.3%, and 2019, when it was 4.1%.

According to Statistics SA, the factors driving the rise in the cost of living over the past few months were also responsible for December’s inflation rate. Large price increases in transport and specifically fuel, as well as price increases in important food groups, such as meat and oils and fats drove the inflation rate up.

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Fuel price’s contribution to inflation

Fuel prices broke through the R20 per litre mark for the first time when the price increased 40.5% in December 2021 compared to December 2020, with inland 95-octane petrol increasing to R20.29 per litre.

The record rise in fuel prices was then also the main factor behind the 16.8% annual increase in the transport index, up from 15.0% in November, while transport inflation contributed 2.3 percentage points to the 5.9% headline rate. Motor vehicle insurance, that falls under the category for miscellaneous items, also increased by 2.6% from November to December for an annual rate to 1.7%.

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Food and non-alcoholic drinks

The index for food and non-alcoholic beverages increased on an annual basis by 5.5% in December. Large price increases were recorded for beef products between November and December, with prices for steak increasing by 2.8%, stewing beef by 2.4% and mince by 1.3%.

The annual rate for meat of 8.6% in December was slightly higher than November’s 8.5%, but it must be noted that the 1.2% monthly increase in meat prices between November and December was far higher than the 0.4% rise recorded between October and November, making it the biggest monthly increase since May 2021, which was also 1.2%.

Oils and fats continued to record relatively high rates of inflation, with an annual increase of 20.8% in December, slightly lower than November’s 21.0%. The average price of a bottle of cooking oil (750 ml) increased by 19c to R30.22 in December and for a jar of peanut butter (400 grams) by 60c to R34.52.

Statistics SA says bread and cereal inflation slowed during 2021, with the annual rate softening to 1.8% in December from the year’s high of 4.9% in May.

ALSO READ: 2021 – The year that totally crippled SA’s already limping economy

What this means for consumers

The latest statistics show that the 5.9% inflation rate is the highest annual reading since March 2017, when the rate was 6.1% year-on-year. The inflation rate was also above the consensus forecast of 5.7% year-on-year.

According to Oxford Economics Africa, December’s increase means that inflation averaged 4.5% in 2021. Oxford Economics expect inflation to increase further during the first quarter of 2022, although it will still be below pre-pandemic levels.

The researchers also point out that the repo rate increase of 25 basis points in November was outweighed by the 0.5 percentage point increase in price inflation in the same month. They say the latest inflationary upsurge has pushed the real repo rate deeper into negative territory and it currently stands at -2.2%.

Add to this the US Federal Reserve’s more hawkish forward guidance and it bears out Oxford Economics’ view of at least another repo rate increase of another 25 basis points in the first quarter. The researchers also expect similar-sized increases in each of the subsequent quarters of 2022.

“Inflation crossed the midpoint of the target band in May last year and we have noted since then that, although prices are rising, consumer prices will not breach the upper echelon of the inflation target range in 2021.”

However, they expect that inflation will more than likely exceed 6% in the coming months before base effects come into play to ensure a steady moderation in price pressures from the second quarter onwards.

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“There are currently various elements of uncertainty that could lead to stickier prices. A weaker rand and higher oil prices specifically will add upward pressure to South Africa’s fuel costs. Although we expect the local currency to weaken in 2022, the risk of a more rapid currency depreciation is considerable.”

The oil price has already increased to its highest level since 2014 and it remains to be seen whether the National Energy Regulator of South Africa will grant Eskom’s proposed 20.5% electricity tariff increase for 2022/23.

“Another limitation to the 2022 inflation outlook is the latent impact of excessive rains on summer crops, with maize planting delayed after various regions across the country experienced heavy downpours during the past two to three months.”

Oxford Economics Africa forecasts that inflation will average 5.1% in 2022.