SA should brace for a sharp rise in inflation rates

THE days of benign inflation in South Africa and globally are likely numbered as major economies begin to tighten monetary policy. Locally, VAT, food and fuel could also push consumer prices higher.

The fuel price is set to rise from May 2 by 49 cents a litre and diesel by either 58c or 59c a litre, depending on the grade, it was announced by the Department of Energy on Thursday.

The increase is driven by a weaker rand and a sharp hike in international oil prices.

Internationally, the yield on US 10-year treasuries breached 3% this week, a first since 2014, another notch in the return to a prefinancial crisis economic climate. But with that there are concerns economies may start to feel inflation pressure.

Global inflation has been relatively level over the past decade despite the “easy money” poured into major economies by central banks to stimulate growth in the wake of the global financial crisis.

As the era of low interest rates comes to an end and major central banks tighten their monetary policy, the outlook for global growth is strong.

This week the IMF stuck to its January estimate for global growth in 2018 of 3.9%, up from 3.8% in 2017.

Sanisha Packirisamy, an economist at Momentum Investments, said global inflation had averaged 3.8% since 2007 but was expected to tick higher as the base effects of lower food and energy prices began to fade.

The oil price this year has surged, rising above $70 (R863) a barrel – close to double the price it was just two years ago.

“However, global inflation is likely to be capped, given the change in a number of factors preventing structurally higher and sustained inflation,” said Packirisamy.

This includes new technology that reduces costs and boosts productivity. She also pointed to an overhang in domestic capacity worldwide in certain sectors of the economy causing a demandsupply imbalance and labour’s low pricing power as other factors that could limit inflation. Chinese overcapacity has led to disinflation in exported prices.

South Africa’s inflation has slowed thanks to lower food prices as good rains have mitigated the effect of the 2015-16 drought and the rand has strengthened in recent months.

Stats SA data shows consumer inflation in March was 3.8%.

But most economists expect the downward trend to start reversing due to the VAT increase and higher fuel duties. Other factors that could affect inflation in 2018 are higher food prices as the country’s maize crop is expected to see a 25% decrease from the record 2017 harvest.

Costlier electricity and the higher oil price coupled with a weaker rand could add to inflationary pressure this year.

NKC economist Elize Kruger said that in 2018 South Africa’s headline inflation could average 4.8% despite the effect of the VAT hike and fuel price pressures. She said her view was slightly optimistic, with the current level of the oil price and rand coming under pressure.

Kruger expects inflation of 5.4% on average next year and 5% in 2020. Her long-term assumption on inflation is 5.2%, above the midpoint of the 3-6% target range.

Despite economic growth in South Africa improving, Kruger said it was doubtful there would be imminent demand-side pressure on inflation as the economy was still weak.

The IMF, in its April World Economic Outlook for 2018, raised South Africa’s growth expectations from 0.9% in 2018 to 1.5%.

Kruger said the country was still struggling with a big negative output gap, which meant there was still slack in the economy due to weaker demand.

“I doubt whether companies will be quick to adjust pricing even if the volumes start coming through.” —