Inflation is on the rampage in South Africa and it’s going to get worse before it gets better, says David Mayfield.
While food and fuel costs have been soaring, the prices of other consumable goods - in categories like household operation costs, furniture and clothing - are also rising faster than had been expected.
It seems that inflation has dug in for the long haul, and the Bureau for Economic Research reckons it will remain above its target range of 3% to 6% for the next two years. Consumers are feeling the pain particularly keenly in the categories of ‘frequently purchased goods’, where inflation is running at nearly three times the rate of ‘discretionary purchases’ - such as vehicles, furniture, household appliances and wages of domestic workers. As in other parts of the globe, food and fuel have been the chief drivers behind the surge in the prices of frequently purchased goods, which grew 12.5% in the year to April. That compares with the overall consumer price index (CPIX), which rose 10.4% in the same period. By contrast, inflation in discretionary items rose to 4.7% to April, and only breached the floor of the inflation target in January this year.
Demand for frequently purchased goods tends not to fall off in the face of price increases. Demand for discretionary purchases, on the other hand, is more sensitive to price, which could limit retailers’ ability to pass on any increases to consumers. So the inflation gap between frequently purchased goods and discretionary purchases is likely to go on widening throughout this year, and could reach over 10% by year’s end.
Electricity tariffs will also fuel the inflationary fire. The National Energy Regulator of South Africa has announced that consumers who receive electricity directly from municipalities will have to pay around 20% more for their energy. That’s on top of a previously-agreed 12% increase from July. The only consolation is that the poor will not be affected by the price adjustment. But this price revision will raise the inflation peak in the third quarter this year by at least a full percentage point, and delay any return to the inflation target range until late 2010.
South African inflation is likely to persist, not only as a result of a secular uptrend in prices of regularly purchased goods but also owing to the relatively backward-looking nature of inflation expectations. The electricity price adjustment adds to the domestic cost base, and inflation expectations have more room to grow given the infectious nature of rising prices of regularly purchased goods. More interest rate hikes may be in store.