A Bleak Christmas Ahead for South Africans

Johannesburg - South African consumers face more tough days ahead with inflationary pressures forcing the Reserve Bank into corners and the Treasury left with little options beyond 2023.

Inflation continues to be on the lips of the average consumer as food and transport prices dig deep into pockets of already over-extended consumers. 

The Reserve Bank’s Monetary Policy Committee meets again on 24 November 2022, with economists predicting a further increase of 50 basis points on the REPO rate, which is the official rate at which banks borrow money. This in turn will lead to banks increasing the Prime lending rate, taking more money out of consumer pockets.

But the Reserve Bank has very little options. It needs to push inflation back into its 3% to 6% range or else face a pricing spiral, led mainly by companies agreeing to above-inflation wage  demands.

Pricing spirals occur when inflation increases because companies give larger salaries, adding liquidity into the market. The greater the liquidity, the greater the inflation, pushing prices further up, which then pushes up wage demands, causing the pricing spiral.

While oil prices are looking bearish, the energy crisis in Europe is weighing down on the South African economy. This is because South Africa imports its petrol and diesel. Diesel prices are at record highs as European demand is pushing up prices. South Africa’s exchange rate to the dollar and Eskom burning diesel to keep the lights on has added further local pressure, with a massive under-recovery for October. This will undoubtedly lead to another big jump in diesel prices in the first week of November. 

Strikes at Transnet over the last two weeks have caused havoc at South African ports, leading to millions of rands in losses across multiple industries. 

A higher repo rate is in fact likely to do very little to ease inflationary price pressure because inflation is currently not driven by higher demand but by international pressure on commodity and food prices. Unfortunately, raising the repo rate is the only tool the Reserve Bank has at its disposal. So consumers are getting burned on both ends - in terms of the cost of credit and price increases where it hurts the most. Especially given the income distribution in South Africa where especially the poor spend most of the money on transport and food. This will only worsen labour tensions and ultimately upward pressure on wages.

All of this leads to some grim news for Christmas. Global commodity price increase and local economic pressure is likely to leave South African consumers trapped in a vicious price increase cycle for some time to come. 

Only time will tell how the Reserve Bank and the Treasury can reverse inflation and relieve the pressure on consumer pockets.

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