Despite food inflation coming in higher in August 2022, economists say that prices should ease as we head to the end of the year. Meanwhile, global oil prices gave cooled, which will have a positive impact on fuel costs.
Stats SA published its consumer price index for August 2022 on Wednesday (21 September), reporting a slight drop in headline inflation to 7.6% from 7.8% in July.
While the number wasn’t as low as anticipated – with markets expecting between 7.3% and 7.5% – it does signal the start of a trend downwards, according to economists at Nedbank.
“Headline inflation is likely to ease further in the months ahead, ending the year at around 6.9%. The downward force will come from falling international oil prices as global growth slows,” the bank said.
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The Brent crude oil price already declined by 13.1% in August and a further 7% in September to date. Brent is down just over 33% from its peak in early March.
Global food prices have also moderated significantly, it said, citing the UN’s FAO price index, which showed that global food inflation eased to 7.9% in August from 13% in July and a recent peak of 34% in March.
However, the declining trend in inflation isn’t cemented in, the economists warned, noting that other factors are expected to slow the rate of moderation in headline inflation, keeping price pressures elevated through to the end of 2023.
“Chief among the upside risks is a vulnerable rand, or perhaps more accurately, an exceptionally robust US dollar. The rand has been under severe pressure against the US dollar, depreciating from its best levels of R14.40 in March to a high of R17.81 in September – its worst level since April 2020.
“The rand strengthened slightly after the release of the inflation figures, but remains at a weak R17.71, down close to 10% since the start of the year,” the bank said.
The rand’s weakness mainly reflects the dollar’s impressive resurgence to a 20-year high against most other major currencies.
The dollar has benefitted from the US Fed’s aggressive interest rate hikes and growing fears that the world economy could slip into a recession on a combination of sticky global inflation, much tighter monetary policies, continued lockdowns in China, and energy shortages in Europe.
On Wednesday, the Fed hiked its policy rate by another 75 basis points (bps), leaving the rand under pressure.
Apart from a weaker rand, higher domestic wage settlements (ranging between 6%-7%) and Eskom’s request for a tariff increase of just over 32% also pose significant upside risks to the inflation outlook, Nedbank said.
“Although the latest inflation figures are encouraging – especially the lower-than-expected outcome for core inflation – the Fed’s relentless rate hikes, persistent rand weakness, and higher domestic wage demands are likely to keep the MPC in a hawkish state of mind. We still expect the MPC to raise the repo rate by 75bps (on Thursday),” the bank said.
Another big catch for optimism around food and fuel prices is that lower oil costs will only benefit petrol – with diesel prices likely to climb next month.
The latest snapshot for the Central Energy Fund (for 21 September) shows that petrol is expected to decrease by R1.00 to R1.13 per litre in October, with diesel expected to increase by 20 cents to 25 cents per litre.
Andre Botha, a senior dealer at financial consultancy TreasuryOne, said that this disparity between petrol and diesel lies in the ongoing conflict in Europe, which is pushing up global demand for diesel.
Should the crisis in the Eurozone continue and supply not increase from oil-producing countries, South Africa could see global demand for diesel drive prices up “for a while”, he said.
Botha said the key difference in the prices of diesel and petrol boils down to supply and demand.
“A lot of market players have bought diesel in the short term due to the lack of supply, as well as the current energy crisis in the Eurozone as the winter approaches,” he said.
“Diesel is used in generating electricity as well as being the preferred fuel for machinery for production. With the market scrambling for diesel surety, supply is king, and suppliers are selling diesel at a premium due to the high demand.”
Botha said that to curb high diesel prices, either a major change in the Russian conflict is needed or an increase in supply from other countries.
But even as alternatives are being explored, any changes will take a while to manifest in the market – so diesel prices are likely to remain under pressure in the near term.
The pressure on diesel prices is significant because most of the vehicles used in the freight industry run on diesel, thus high prices will impact costs along the supply chain which will invariably be passed on to consumers.
Diesel is also being used extensively by Eskom to supplement its generating capacity during load shedding – and this cost is a key component of the power utility applying for a massive 38% increase to electricity prices in 2023.
Read: Warning over diesel prices in South Africa