Brace yourself: Impact of higher inflation to hit consumers very soon

Consumers will be hit by higher inflation rates very soon, as the impact of the war in Ukraine will inevitably lead to increased price pressures over the coming months on products such as bread and cooking oil.

Economists worry that the effect of higher input costs due to increased fertiliser and fuel prices will drive domestic food price inflation higher this year.

After Statistics SA announced on Wednesday that the country’s rate of inflation for February was 5.7% year-on-year, unchanged from the previous month, the focus now shifts to the Monetary Policy Committee (MPC) of the South African Reserve Bank (Sarb) that will announce the new repo rate tomorrow. 

Economists’ group Oxford Economics Africa says the inflation rate for February was lower than the consensus forecast of 5.8% and does not reflect the 7.2% month-on-month fuel price increase in March.

ALSO READ: February inflation rate remains at 5.7% despite large increases in price of maize, bread and fish

Get ready for higher food prices

“Given that Russia and Ukraine are major producers of wheat and sunflowers, South African households can soon start to see higher prices for items such as bread and cooking oil. The food and non-alcoholic beverages category represents about 17% of the overall consumer price basket, with inflation remaining sticky at elevated levels amid soaring global food prices.”

The group points out that South Africa has been fortunate with bumper maize harvests in recent seasons, which means that food security is not an immediate concern. However, heavy rains had a negative impact on the latest crop building season.

Despite these worries, domestic food inflation is still far below 2016 levels, when South Africa’s worst drought in 30 years disrupted food production and caused steep price increases for consumers.

ALSO READ: Food price crisis: Sunflower and all other edible oil prices expected to skyrocket

Transport inflation due to high global oil price  

Transport inflation will probably also increase in the coming months due to soaring oil prices, the group says.

“Fuel accounts for 4.7% of total CPI and registered at 29.1% year-on-year in February, which is still some way off from the peak level of around 46% year-on-year recorded in 2008, when oil prices rose to record levels of around $150pb.”

The group says it is easy to get carried away with all the market volatility but is saw that extreme fuel price increases are overexaggerated so far.

Oxford Economics Africa forecasts that inflation will average 5.6% this year compared to 4.5% in 2021.

“February’s price statistics, as well as the Federal Reserve’s latest 25 basis points interest rate increase, supports our view that the Sarb is likely to lift the repo rate by 25 basis points during its upcoming policy meeting.”

Consumers will feel the pressure from all sides in 2022 and the Sarb will be focussed on containing the longer-term impact that higher prices have on spending power, while considering real interest rate levels and potential risks of portfolio outflows.

Herman van Papendorp, head of investment research and asset allocation at Momentum Investments, says services inflation remains muted and the gap with goods inflation remains wide.

“While the effect of commodity prices on the headline reading has become more apparent, underlying measures of inflation remain largely intact.”

He says international oil prices pose the largest upside risk to headline inflation, while higher input costs will pose a risk to food inflation.

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Why is the inflation rate so important for consumers?

The inflation rate is important for inflation targeting, a framework in which the Sarb uses monetary policy tools, especially the control of short-term interest rates, to keep inflation in line with a given target.

South Africa’s inflation target range is 3−6%. This target was introduced in 2000 and since 2017, the MPC has emphasised it would like to see inflation close to the 4.5% midpoint of the 3–6% target range.

The main idea of inflation targeting is that monetary policy has only temporary effects on growth, but permanent effects on prices.

Inflation targeting has made central banks more accountable and transparent.