South Africa’s cost-of-living crisis worsens as consumer inflation breaches the Reserve Bank’s 6% target

Consumer inflation in South Africa has continued its relentless surge to a new six-year high of 6.5% in May 2022 from the same month a year ago, driven by skyrocketing food and fuel costs.

Statistics South Africa said on Tuesday the consumer price index – which measures what consumers pay for goods and services – rose in May to its fastest pace since January 2017, up from the 5.9% annual rate recorded in April. The inflation rate in January 2017 was 6.6%. 

Rising prices have been unrelenting over the past few months, which has entrenched the cost-of-living crisis among households in South Africa. 

The Reserve Bank, which has the role of stabilising prices, typically wants the inflation rate to be between 3% and 6%. But at 6.5% in May, it has breached the upper 6% limit of the target band set by the bank. It is also the 13th consecutive month in which annual inflation has been higher than the midpoint of the bank’s target range. 

Much of the inflation pressure is from food, petrol and travel costs, worsened by the Russia-Ukraine war that has made international oil prices more expensive, especially for a country like South Africa, which relies heavily on oil imports. 

Transport costs soared by 15.7% in the year to May. For the fourth consecutive month, transport costs were the largest contributor to the May inflation rate of 6.5%, contributing 2.1 percentage points. Food costs remain elevated at 7.6%, while housing and utility costs increased by 4.9%, and other goods and services by 3.9%. 

Price pressures have also been building up from supply constraints and strong consumer demand as South Africa’s economy continues to recover from the Covid-19 pandemic.

More interest rate hikes 

Industry players expect the upward trend in inflation to push the Reserve Bank to continue increases to the repurchase or repo rate, which informs the interest rates at which commercial banks lend to households and businesses. The Bank’s next repo rate decision is expected on 21 July. 

Increasing interest rates can tame rising inflation as it has the effect of cutting the disposable income of consumers because debt repayment costs rise, curbing their demand for goods across the economy, which puts downward pressure on prices.

Kevin Lings, Stanlib’s chief economist, says there will still be upward pressure on inflation, which might rise above 7% in the coming months. This is because there are still large petrol price increases to come. 

The latest unaudited data released by the Central Energy Fund, a state-owned entity that tracks fuel prices, indicate that prices for different grades of petrol (95 unleaded and 93 unleaded) are set to rise by between R1.85 per litre and R2 per litre in early July. These sharp increases can be attributed to a strong dollar, a weakening rand, bullish global oil prices and the war in Ukraine. 

Rising inflation and interest rates are a global phenomenon. Central banks in the US, the UK, Switzerland and Asia-Pacific regions are adopting an aggressive approach to interest rate hikes to fight rising inflation. 

Luigi Marinus, a portfolio manager at financial services company, PPS Investments, says although the Reserve Bank has been “ahead of the curve” in terms of increasing interest rates before inflation breached the upper 6% limit of its target band, the increases have not done enough to keep inflation low. 

“This is largely as a result of exogenous factors, like the oil price and a general increase in global inflation, which the [Reserve Bank] has no control over,” Marinus says in a note. 

Marinus says the US central bank’s next move on interest rates will have a larger influence and impact on prices globally, even in South Africa. The bank has to balance increasing interest rates to reduce high inflation against the negative effect that such increases might depress the US economy, potentially throwing it into recession territory. DM/BM