South Africa is experiencing a sharp rise in fuel prices, creating a risk of further inflation and a potential increase in interest rates. This process forms a vicious cycle that puts pressure on already strained household budgets.
Increased Monthly Payments
Investec Chief Economist Annabel Bishop noted that the recent significant increase in fuel costs is likely to lead to a renewed rise in consumer price inflation (CPI) closer to 5% year-on-year. Furthermore, this could be the reason for another repo rate hike in South Africa in November.
On Wednesday, the price of petrol increased by between R3.12 (for 93 Unleaded) and R3.33 (for 95 Unleaded), while diesel fuel rose from R2.84 (500ppm) to R3.24 (50ppm).
Inflation in August was 4.4%, slightly higher than the July figure. Meanwhile, transport cost growth increased by 8.8% year-on-year.
Bishop also pointed out that market concerns regarding the impact of the Middle East war on oil and petroleum prices have intensified as the conflict escalates. She forecasts an increase of 0.25 percentage points for the remainder of the year. If the 25 basis point hike raises the base rate to 11%, this will affect households even before they refuel their cars.
Increased Monthly Payments
If the rate hike leads to the base rate increasing from 10.75% to 11%, the monthly payment for a R1.5 million mortgage over 20 years will increase from approximately R15,228 to R15,483, adding R255 to monthly payments. Similarly, a car loan of R500,000 over six years will increase from about R9,453 to R9,517, adding another R64.
Thus, for a household with both debts, this amounts to an additional R319 per month, not including rising costs for fuel, transport, and food. According to the latest quarterly bulletin from the South African Reserve Bank, household debt burden reached 62.2% of disposable income in the first quarter, with the cost of servicing debt at 8.4%.
The situation looks particularly difficult for consumers who are already under financial strain. A DebtBusters Money-Stress Tracker survey conducted among nearly 18,000 respondents showed that 53% spend more than 40% of their net income on debt repayment, up from 48% the previous year. Among respondents earning over R20,000 per month, 75% spend more than the recommended 30% on debt, and those earning over R50,000 per month theoretically might pay more than they earn while repaying loans.
Rising Transport Costs
Trucking companies delivering goods and other products across the country are feeling the same shock impact on diesel prices. The Road Freight Association reports that fuel accounts for between 35% and 55% of the operating costs of freight companies. Based on the September diesel price increase, the association estimated that freight operating costs could rise by approximately 4%–6%.
More than 80% of land transport is carried out by road vehicles, including the movement of produce between farms, processing plants, distribution centers, and retail outlets. However, an increase in transportation costs does not always lead to a direct and proportional rise in supermarket shelf prices.
For the average driver, the latest price increase means that even filling a 30-liter tank in a small car will cost R100 more, and for larger tanks—another R200. The cost of fuel per kilometer also increases by 19 cents to 32 cents, depending on the type of vehicle.
Some Positive Aspects
PSG Senior Economist Johann Els noted that there has not yet been a noticeable transfer of the rise in petrol and diesel prices into the prices of food and other consumer goods. He emphasized that food inflation has actually decreased compared to the beginning of the current year. Instead, consumers forced to spend more on fuel and transport have less money for other purchases, which, according to Els, creates a substitution effect.
Els also suggested that wholesale and retail sellers might partially absorb the price increases instead of passing them on to buyers and risking lost sales. Consequently, fuel price increases could cause 'deflationary forces' as consumers spend more on transport and less on other needs, while companies try to maintain sales volumes.
Despite this, the cost of the food basket, measured by the Economic Justice and Dignity Group's Pietermaritzburg Household Affordability Index, increased by 2% year-on-year, reaching an average of just under R5,500. The annual increase in the average cost of priority items in the household basket was 2.9%.