Old Mutual has cautioned financially-constrained consumers to brace themselves for potential challenges ahead, on the back of elevated petrol prices and inflation looming large.
This comes as Statistics South Africa is set to release April’s consumer price index (CPI) data tomorrow, after headline inflation dipped from 5.6% in February to 5.3% in March, though it increased by 0.8% month on month.
Old Mutual group chief economist Johann Els today anticipated that inflation would probably remain unchanged, at 5.3%, with potential relief expected in subsequent months due to easing petrol prices.
A significant fuel price cut in June has been forecast as unaudited mid-month data from the Central Energy Fund showed that 95 ULP was expected to drop by about 61c/litre, and 93 ULP by about 63c/litre due to a strengthening rand and lower international oil prices.
One of the primary drivers of the recent higher-for-longer inflationary trend has been the petrol price hikes witnessed throughout the year as petrol remains above R25 a litre inland.
Els said the fuel price hikes from February to May had exerted considerable pressure on consumer-spending patterns.
Given that transport costs represent a significant portion of household budgets, Els said any fluctuations in the petrol price would inevitably have a ripple effect across various economic sectors.
“This figure, while consistent with recent trends, poses challenges as it exceeds the South African Reserve Bank’s target, potentially dampening economic sentiment.”
Els said there was a complex relationship between petrol prices and broader inflationary trends, emphasising their impact on consumer-spending patterns and the economy at large.
He said the base effect, coupled with petrol price hikes, contributed to the complexity of the inflationary landscape, necessitating a nuanced approach to monetary policy.
Els highlighted the ripple effect of the dynamics on food inflation, a critical component of the CPI basket.
While March witnessed further easing in food inflation, to 4.9%, Els anticipated a potential further moderation to below 4.5% for April, albeit against the backdrop of increasing significance attributed to the base effect.
He also noted a substantial decline in the weighted average inflation rate for consumer goods over the past year, falling from 5.6% to 4.2%.
“This trend underscores the deflationary impact of petrol price hikes on consumer-spending habits, influencing categories such as clothing, footwear, furniture, appliances and vehicles,” he said.
In the US, consumer prices increased less than expected in April, by 0.3% after advancing 0.4% in March and February, suggesting that inflation resumed its downward trend and boosted the expectations for a September interest rate cut.
While the short-term outlook for inflation appears to be a plateauing at 5.3%, with headline inflation only dipping to the 4.5% mid-point of the target range in the third quarter, the Reserve Bank faces a delicate balancing act, aiming to curb inflation without stifling economic growth through excessively high-interest rates.
Long-term solutions may involve addressing structural issues that contribute to inflationary pressures, such as supply chain bottlenecks, administered price settings and import dependence.
Els cautioned against the potential repercussions of prolonged maintenance of high-interest rates, highlighting the risk of driving consumer goods inflation substantially lower to mitigate headline inflation.
While external cost push factors, such as the rand exchange rate and oil prices, remained beyond the Reserve Bank's direct influence, he further highlighted the South African Reserve Bank’s capacity to influence other price dynamics significantly.
BUSINESS REPORT