Good news for gasoline and food prices in South Africa, but there is a problem

Despite food inflation rising in August 2022, economists say prices are expected to decline as we approach the end of the year. Meanwhile, global oil prices have cooled, which will have a positive impact on fuel costs.

Stats SA released its consumer price index for August 2022 on Wednesday (September 21), posting a slight decline in headline inflation to 7.6% from 7.8% in July.

Although the number wasn’t as low as expected – with markets expecting between 7.3% and 7.5% – it signals the start of a downtrend, according to Nedbank economists.

“Headline inflation is likely to decline further in the coming months, closing the year at around 6.9%. The downward force will come from drop in international oil prices as global growth slows, “the bank said.

The price of Brent crude oil has already fallen by 13.1% in August and a further 7% in September to date. Brent is down by just over 33% from its early March peak.

Global food prices also fell significantlyhe said, citing the UN FAO Price Index, which showed global food inflation fell to 7.9% in August from 13% in July and from a recent high of 34% in March.

However, the downward trend in inflation is not cemented, economists warn, noting that other factors are expected to slow the rate of moderation of headline inflation, keeping price pressures high until the end of 2023.

“Chief among the upside risks is a vulnerable rand, or perhaps more precisely, an exceptionally robust US dollar. The rand came under severe pressure against the US dollar, depreciating from its best levels of R14.40 in March to a high of R17.81 in September, the worst level since April 2020.

“The rand strengthened slightly after the inflation data was released, but remains at a weak R17.71, down almost 10% since the start of the year,” the bank said.

The weakness of the rand mainly reflects the dollar’s impressive resurgence at the 20-year high against most other major currencies.

The dollar has benefited from the US Fed’s aggressive interest rate hikes and growing fears that the world economy may slide into a recession due to a combination of sticky global inflation, much tighter monetary policies, continued lockdowns in China and shortages. of energy in Europe.

On Wednesday, the Fed raised the benchmark rate by another 75 basis points (bps), leaving the rand under pressure.

In addition to a weaker rand, higher domestic wage agreements (between 6% and 7%) and Eskom’s request for a rate hike of just over 32% also pose significant upside risks to the inflation outlook. Nedbank said.

“While the latest inflation data is encouraging, particularly the lower-than-expected result for core inflation, the Fed’s relentless rate hikes, persistent rand weakness and higher domestic wage demands are likely to maintain. the MPC in a hawkish mood. They still expect the MPC to raise the repo rate by 75bps (Thursday), “the bank said.

Fuel prices

Another big problem with optimism about food and fuel prices is that lower oil costs will only benefit gasoline, with diesel prices likely to rise next month.

The latest snapshot for the Central Energy Fund (for September 21) shows that gasoline is expected to decrease by 1.00 cents to 1.13 rupees per liter in October, with diesel expected to increase by 20 cents to 25 cents. cents per liter.

Andre Botha, a senior dealer at financial advisory firm TreasuryOne, said this disparity between gasoline and diesel lies in the ongoing conflict in Europe, which is driving up global demand for diesel.

If the crisis in the Eurozone continues and supply does not increase from oil-producing countries, South Africa could see global demand for diesel rising prices “for a while,” he said.

Botha said the key difference in diesel and gasoline prices comes down to supply and demand.

“Many market players have bought diesel in the short term due to lack of supply, as well as the current energy crisis in the Eurozone as winter approaches,” he said.

“Diesel is used in electricity generation, as well as being the fuel of choice for production machinery. With the market grappling with the diesel warranty, supply is king and suppliers are selling diesel at a high price due to high demand. “

Botha said that in order to curb high diesel prices, a major shift in the Russian conflict or an increase in supply from other countries is needed.

But even if alternatives are being explored, it will take some time to manifest in the market, so diesel prices are likely to remain under pressure in the short term.

The pressure on diesel prices is significant because most vehicles used in the freight industry run on diesel, so high prices will affect costs along the supply chain that will invariably be passed on to consumers.

Diesel is also used extensively by Eskom to supplement its generation capacity during load shedding and this cost is a key component of the energy services company requiring a massive 38% increase in electricity prices in 2023.

Read: South Africa Diesel Price Warning