Little demand, even less supply

South Africa’s inflation rate reached 7,2% year-on-year in December 2022, and while this was 0,2% lower month-on-month, it was still higher than the target of 3% to 6% set by the South African Reserve Bank (SARB).

Inflation refers to the increase in prices of goods and services, and in July last year, the country reached a peak inflation rate of 7,8%. As a result, in December, we were paying an average of 7,4% more for said goods and services, while the salaries of many South Africans increased by far less than the inflation rate. So, in essence, we are all getting poorer.

There are various other reasons for the rise in the cost of goods and services. For example, the skyrocketing fuel prices have certainly added to the burden of inflation. In addition, as the world continues to recover from the COVID-19 pandemic and demand increases, the supply of commodities continues to decrease, leading to higher prices. What’s more, the Russia-Ukraine war has led to further diminished supplies and even more price hikes.

Higher inflation means consumers have less money to spend on both necessities and luxuries. This has a negative impact on agriculture, as farmers who produce ‘luxury’ goods, such as berries and nuts, may find the market for their produce diminishing. Input costs are also on the rise, which means that farmers are receiving less money for their produce. This, of course, has a domino effect on other industries that rely on primary agriculture to generate income.

One of the ways in which central banks such as the SARB have tried to curb inflation is by raising the interest rate. This means that consumers have less money to spend on goods and services, which leads to a decrease in demand and a stabilisation of prices.

However, this is a double whammy for South African consumers, who are battling not only surging food prices, but unemployment and load-shedding, too, which will undoubtedly lead to more unemployment as small businesses exit their respective industries.

Essentially, the problem we face is not an increase in demand, but rather a lack of supply. Thus, raising the interest rate will have little long-term benefits in terms of inflation, but rather long-term disadvantages on the overall economic health of South Africans as they struggle to pay off their debt.

While the Russia-Ukraine war has become the most prominent excuse among politicians for the increase in inflation, the truth is that the world is really only now starting to experience the impact of months and months of lockdowns. The slowdown at ports and closure of factories have led to very limited supply on the market, and industries are struggling to catch up.

In South Africa, this is compounded by the energy crisis, which has very little possibility of being resolved in the short or medium terms.

From this perspective, 2023 is going to be a difficult year. Nonetheless, South Africans are a resilient bunch of innovative problem-Ȳsolvers. Farmers, in particular, are adept at making the most out of a tough situation, and this is perhaps the one good thing that will come out of the issues we are currently dealing with.