While the easing of inflation from 7.4% year-on-year in November 2022 to 7.2% in December has been welcomed by all, it is clear that the fight against the continued increase in living costs is far from over.
Inflation is still way above the Reserve Bank’s target range of between 3% and 6%, and is likely to stay high until the second half of 2023.
Listen: Consumer price inflation eases, but don’t get too excited yet
High inflation is hitting consumers hard, evident from sitting back and reading carefully through the latest Statistics South Africa (Stats SA) inflation report. It stands out that the cost of necessities – particularly food – is still increasing fast.
Food and beverage eclipse transport as biggest contributor
Tshiamo Masike, economic analyst at Momentum Investments, says it is noticeable that food and non-alcoholic beverages replaced transport as the largest contributor to inflation in December, despite signs that food inflation might have peaked in November 2022.
The Stats SA report reveals that food is 12.4% more expensive than a year ago and non-alcoholic drinks 9.7% more. The price of a hot drink increased by 14.6%.
In contrast, the prices of products used for recreation and cultural activities increased by just 3.4%, and that of clothing and footwear by only 4.1%. There might be several reasons for these prices increasing only a little, but households cutting back on non-essential expenditure must surely rate near the top.
Masike says the 18.6% increase in the electricity tariff recently announced by the National Energy Regulator of SA (Nersa) for the 2023/2024 financial year, followed by an increase of 12.7% in the following financial year, is expected to impact inflation between 0.1% and 0.2% given the 3.7% weight of electricity in the consumer basket.
“Moreover, it is expected to feed into inflation expectations, which came in higher across all time horizons surveyed in December 2022,” says Masike.
The poor suffer disproportionately
However, the really bad news in the inflation report are the indications that it is the poorer sections of society that are hit the hardest by high inflation. “Persistently high inflation in 2022 disproportionately impacted vulnerable consumers,” says Masike.
Buried in one of the tables in the report is a devastating figure: the cost to households of domestic workers’ wages increased by 4.2% during the last 12 months – far less than the increase in the cost of basic foods that such workers will buy.
The Stats SA analysis of inflation grouped by expenditure levels shows that the inflation rate for lower-income workers is higher than that of people who have more money to spend – and was much higher in 2022 than in the previous year.
Figures for inflation per expenditure decile show that people who have less than R20 000 to spend per annum, equal to less than R1 700 per month, saw their expenditure increase by 10.4% (December 2022 vs December 2021). Their inflation rate was 6.2% in the previous year.
People who have between approximately R20 000 and R33 000 to spend a year (R1 700 to R2 750 per month) had to cope with an inflation rate of 9.8%, and those spending between R34 000 and R65 000 per annum (around R2 800 to R5 400 per month) had an inflation rate of 8.6%.
A closer look at the rise in prices of food poorer people are likely to buy illustrates their plight.
Stats SA highlights some of the price increases in a discussion of its Consumer Price Index report. “Bread and cereal products have had the most significant impact on overall food inflation, with the annual rate reaching 20,6% in December.
“This is markedly higher than the low of 1,5% recorded in January 2022. In fact, December’s reading is the highest since February 2009 (23,8%).
“Maize meal prices rose by 33,7% in the 12 months to December, with a monthly increase of 1,9% (December vs November). The index for rice increased by 1,3% between November and December,” says Stats SA.
Supplementary information in the report discloses that the price of frozen chicken portions increased by 11% over the last year and meat overall by 9.7%.
No end in sight
While inflation has been decelerating from the high in October, economists warn that there are risks to the upside.
FNB economist Koketso Mano says the bank predicts that headline inflation will ease further, to 6.7% in January.
“Headline inflation should moderate to within the inflation target range, at just over 5.0%, later in 2023.
“This is with fuel as well as food and non-alcoholic beverages decelerating this year, while core inflation continues to normalise and electricity inflation edges higher following Nersa’s approval of a near 19% price increase for Eskom’s direct consumers.
“Global inflation is falling but expectations remain elevated relative to pre-pandemic levels. Risks are tilted upwards as EU sanctions on Russian oil products come into effect in February, adding to the impact of export restrictions in some food markets and the overall impact of progressive onshoring,” says Mano.
Read: Europe’s new sanctions on Russian oil kick in: What changes?
The Bureau of Economic Research (BER) at Stellenbosch University, commissioned by the SA Reserve Bank to conduct a quarterly inflation expectation survey (among financial analysts, business people, trade union officials and households) to aid the bank’s inflation targeting policy, found in the latest survey that all the groups expect inflation to trend higher.
These expectations often come true as people are willing to pay more for stuff if they expect to pay more.
On average, survey respondents expect inflation over the next five years to average 5.5% per annum. Business people expect it to average 6.1% per year. Households expect inflation to be no lower than 6.3% in 2023.
Overall consensus among economists and others is that the Reserve Bank’s Monetary Policy Committee will announce another interest rate increase on Thursday.
The only difference in opinion is whether the committee members will opt for a 50 basis point (bps) increase, or take into account the devastating effect of electricity disruptions and vote for an increase of 25bps.
Read: To hike repo rate by 50bps or 25bps, that is the question
A 50bps increase will push the prime overdraft rate to 11%, compared to 7.5% a year ago.
It is safer not to mention the increase in petrol and diesel prices, nor the steep increases in administered prices.
It is enough to drive one to drink, if you can afford to – the price of alcohol increased by nearly 7% over the past year.