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The latest figures from Statistics South Africa (Stats SA) show that consumer inflation fell to 3% in February, where it stood at 3.5% a month earlier.
Although this downward trend brings relief to consumers, economic analysts warn that external factors, especially the turmoil in the global oil market, could quickly reverse the progress.
The monthly change in the consumer price index (CPI) was 0.4%. According to StatsSA, this increase is lower than the 0.9% recorded in February last year, which explains why the annual inflation rate has now decreased.
According to StatsSA, the drop can be attributed mainly to three factors: the delayed increases in medical contributions, lower fuel prices and a more moderate increase in the cost of health services.
(Photo: Batch SA/X)
Medical increases play a big role
Most medical schemes increase their contributions at the start of the year, and StatsSA usually measures these adjustments in February. However, not all schemes adjusted their rates at the same time this year, meaning that the full impact is not yet reflected in the figures.
The medical funds that did introduce increases recorded an average increase of 6.4% in health insurance; this is significantly lower than the 10.5% recorded in February last year.
Because health insurance has a large share of 6.2% in the CPI, this delay has kept the overall inflation rate noticeably low. However, analysts warn that these delayed increases are likely to cause the inflation rate to rise again later this year.
Fuel prices bring short-term relief
The second factor was a drop in fuel prices, which brought direct and immediate relief to consumers.
Fuel fell by 3.1% on a monthly basis in February, in contrast to the 3.9% rise in the same month last year. On an annual basis, the fuel index decreased by 10.1%.
This drop not only reduced transport costs, but also indirectly relieved pressure on other prices. Analysts warn, however, that this relief is likely to be short-lived, as international oil prices have already risen sharply and are putting pressure on prices elsewhere.
(Archive photo: Nico Strydom/Maroela Media)
Medical services rise more slowly
The third factor is that prices for medical services rose at a slower rate than last year.
The monthly increase was 3.8%, compared to 5% in February last year. Services such as dentists (5.3%), paediatricians (4.4%), general practitioners (3.5%), physiotherapists (2.2%) and opticians (1.6%) did become more expensive, but at a more moderate rate.
Food prices
Consumers also experienced relief at the food basket.
Food inflation started to decline for the first time in four months. The annual inflation rate for food and non-alcoholic beverages fell from 4.4% in January to 3.7% in February, while prices fell by 0.3% on a monthly basis.
Prices of grain products also fell slightly, with a decrease of 0.5%. White rice now costs 12.5% less than last year, while spaghetti (0.5%) and brown bread (0.1%) have also become slightly cheaper.
Meat inflation fell from 13.5% in January to 12.2%. This is the first drop in almost a year, with prices falling by 1.1% on a monthly basis.
Beef products showed significant price declines, including offal (-4.0%), stew meat (-3.7%), ground beef (-3.2%) and steak (-2.6%). Other products that have become cheaper include pork (-1.6%) as well as lamb and mutton (-1.4%).
(Photo: Batch SA/X)
Oil and fat cheaper; drinks more expensive
Prices for oils and fats fell by 0.4% in February, although the annual rate remained at 4.0%. Olive oil became cheaper by 2.1%, while sunflower oil was 0.6% cheaper.
In contrast, alcoholic beverages have become more expensive. The inflation rate for this category rose to 5.1%, with beer increasing by 1.2% in February. Brandy has risen by 6.0% since February last year, while spirit coolers and cider have become more expensive by 4.8%.
Price shocks on the way
Despite the lower inflation rate, Theuns du Buisson, economic researcher of the Solidarity Research Institute (SNI), warns that consumers should not be misled by the current figures.
“Excitement over the latest adjusted consumer price index of 3% will be short-lived due to the impact the oil price crisis will have on South Africa.
“Although monetary policy is by far the biggest determinant of the inflation rate, many other factors also play a role. The biggest of these is energy prices, which are currently completely outside of South Africa’s control.
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“When fuel prices rise sharply, we usually see a chain reaction through the economy: from transport and food to manufacturing. This ultimately leads to widespread price shocks that directly affect consumers.”
Du Buisson warns that fuel prices may start to rise sharply already in April.
“Fuel prices will skyrocket in April and this will inevitably cause other prices to rise as well. These types of shocks hit consumers fast and hard because they affect basic expenses.”
The situation in the Middle East, especially in Iran, will also play a decisive role.
“If the US and Israel achieve their goals in Iran quickly, everything should at least return to normal by June. If Iran gets a friendlier government and supplies oil itself on the open market, oil prices can drop drastically, which will then be excellent news for consumers.”
“Then the month or three of high fuel prices could possibly be considered ‘worth it’ because fuel prices can then remain sustainably low,” says Du Buisson.
However, he emphasizes that the biggest challenge right now is uncertainty.
“It is simply impossible to predict how long the conflict will last. This uncertainty makes it very difficult for businesses and consumers to plan ahead.”
Du Buisson warns that the impact of future price shocks will be particularly felt during wage negotiations.
“Consumers should brace themselves for serious price shocks in the short term. This is particularly worrying in sectors where wage negotiations are currently taking place. If the current low inflation rate of 3% is used to determine salary increases, when everyone knows that price shocks are on the way, workers could end up being financially disadvantaged when their purchasing power suddenly declines.”
He appeals to employers to proceed with caution. “Employers must take this risk into account and not just focus on the current inflation rate. Decisions made now can have a big impact when prices start rising rapidly again.”
Jee-A van der Linde, senior economic researcher at Oxford Economics, says the low February inflation is welcomed. However, he also warns that a sharp rise in fuel prices can quickly change the situation.
He also warns that fuel prices may rise sharply in April – according to the latest estimates by around R4.50 per liter for petrol and R7.40 per liter for diesel.
Photo for illustration only. (Photo: Pieter Cloete/Maroela Media)
“If these levels continue for the rest of the first half of the year, this could significantly slow down economic activity,” says Van der Linde.
In addition, the proposed increase in the general fuel levy (2.2%) and the contribution to the Road Accident Fund (3.2%) is expected in April, which may put further pressure on consumers.
According to Van der Linde, South Africa’s strategic oil reserves – around eight million barrels – do not offer much of a buffer if international oil prices rise further.
“The country’s dependence on imported fuel means that low international prices and a stronger rand are currently helping, but if this dynamic changes, it could have a dramatic impact on inflation.”
He further notes that the South African Reserve Bank will probably not reconcile its policy until the third quarter, depending on the developments in oil prices.
“If prices fall to around $80 per barrel by the second half of the year (around R1 520 at the current exchange rate) a possible reduction in the interest rate for the second half of the year is expected.”
The downward surprise in South Africa’s headline inflation for February is positive in the short term, but Van der Linde says they expect price pressure to increase again in the second quarter.
South Africa’s outlook for low inflation has changed, and depending on how long the oil price shock lasts, future inflation figures could be significantly higher.
“South Africa’s friendly inflation outlook is shifting, and – provided the figure for March is not exceptionally different – it is expected that upcoming inflation figures could show significant increases.
“The protracted conflict in the Middle East could eventually lead to reduced demand, which could slow down South Africa’s fragile growth momentum. Nevertheless, the benefit of commodity prices should still be largely supportive this year. We have lowered real GDP growth this year slightly to 1.4% from 1.5% in the previous estimate,” says Van der Linde.