While the drop in inflation from 7.4% yoy in November 2022 to 7.2% in December has been welcomed by all, it is clear that the battle against the ongoing rise in the cost of living is far from over.
Inflation is still well above the Reserve Bank’s 3% to 6% target range and is likely to remain high into the second half of 2023.
High inflation is hitting consumers hard, as evidenced by sitting back and perusing the latest Statistics South Africa (Stats SA) inflation report. It is striking that the cost of essential goods – especially food – is still rising rapidly.
Food and beverage transportation crowds out the largest contributor
Tshiamo Masike, economic analyst at Momentum Investments, says it’s striking that food and non-alcoholic beverages overtook transportation as the largest contributor to inflation in December, despite signs that food inflation may have peaked in November 2022.
The Stats SA report shows that groceries are 12.4% more expensive than a year ago and soft drinks are 9.7% more expensive. The price of a hot drink increased by 14.6%.
In contrast, the prices of leisure and cultural products increased by only 3.4%, clothing and shoes only by 4.1%. There may be a number of reasons these prices are increasing only modestly, but households cutting non-essential spending must certainly be at the forefront.
Masike says that the recently announced 18.6% increase in the electricity tariff for the 2023/2024 financial year by the National Energy Regulator of SA (Nersa), followed by a 12.7% increase in the following financial year, is expected to reduce inflation between 0 .1 and 0.1% and 0.2% will affect given the power weight of 3.7% in the consumer basket.
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“In addition, it is expected to affect inflation expectations, which turned out higher in December 2022 across all time horizons examined,” says Masike.
The poor suffer disproportionately
The really bad news in the Inflation Report, however, is the evidence that high inflation is hitting poorer sections of society hardest.
“Persistently high inflation in 2022 will disproportionately hit vulnerable consumers,” says Masike.
Buried in one of the report’s charts is a devastating figure: The cost of wages for domestic workers for households has risen 4.2% over the past 12 months – far less than the increase in the cost of basic groceries these workers will buy.
Stats SA’s inflation analysis, grouped by spending level, shows that the inflation rate for low-income earners is higher than that of those who have more money to spend – and was much higher in 2022 than a year earlier.
Inflation figures per spending decile show that spending by those who can spend less than R20,000 per year, equivalent to less than R1,700 per month, increased by 10.4% (December 2022 vs. December 2021). Their inflation rate was 6.2% in the previous year.
People spending between about 20,000 and 33,000 rand a year (1,700 to 2,750 rand a month) had to contend with an inflation rate of 9.8%, and those spending between 34,000 and 65,000 rand a year (about 2,800 to 2,800 rand 2,000 rand). R5 400 per month) had an inflation rate of 8.6%.
A closer look at the rise in the price of food that poorer people are likely to buy highlights their plight.
Stats SA highlights some of the price increases in a discussion of its Consumer Price Index report.
“Bread and grain products had the biggest impact on overall food inflation, with the annual rate hitting 20.6% in December.
“This is significantly higher than the 1.5% low recorded in January 2022. In fact, the December reading is the highest since February 2009 (23.8%).
“Corn grist prices increased 33.7% in the 12 months to December, with a monthly increase of 1.9% (December vs. November). The rice index increased by 1.3% between November and December,” says Stats SA.
Additional information in the report shows that the price of frozen chicken portions has increased by 11% over the last year and all meat by 9.7%.
No end in sight
While inflation has slowed since October’s peak, economists warn of upside risks.
FNB economist Koketso Mano said the bank forecast headline inflation to fall further to 6.7% in January.
“Headline inflation should moderate to just over 5.0% later in 2023, within the inflation target range.
“This comes as fuel and food & soft drinks slow this year, while core inflation continues to normalize and electricity inflation continues to rise after Nersa agreed to a nearly 19% price hike for Eskom’s direct consumers.
“Global inflation is declining but expectations remain high compared to pre-pandemic levels. Risks are compounded as EU sanctions against Russian oil products come into effect in February, compounding the impact of export restrictions on some food markets and the overall impact of ongoing onshoring,” Mano says.
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The Bureau of Economic Research (BER) at Stellenbosch University, commissioned by the SA Reserve Bank to conduct a quarterly survey of inflation expectations (among financial analysts, businesspeople, union officials and householders) in support of the bank’s inflation targeting policy, found in last Survey that all groups expect a higher trend in inflation.
These expectations often come true as people are willing to pay more for things when they expect to pay more.
On average, survey participants expect inflation to average 5.5% per year over the next five years. Business people expect an average of 6.1% per year. Households expect inflation to be no lower than 6.3% in 2023.
The general consensus among economists and others is that the Reserve Bank’s Monetary Policy Committee will announce another rate hike on Thursday.
The only difference of opinion is whether committee members will opt for a 50 basis point (bps) hike or will take into account the devastating effects of power disruptions and vote for a 25 bps hike.
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A 50 basis point hike will push the prime overdraft rate down to 11%, down from 7.5% a year ago.
It is safer not to mention the increase in gasoline and diesel prices and the large hikes in administered prices.
It’s enough to drive one to drink if you can afford it – the price of alcohol has risen by almost 7% in the past year
This article originally appeared on Moneyweb and has been republished with permission.
Read the original article here.