The rise in oil and fuel prices is capable of creating additional pressure on South African consumers due to increased costs for transport, food, and credit, which exacerbates the already fragile economy.
The latest surge in oil prices threatens to cause new difficulties for South African consumers. Higher fuel costs can affect various aspects, ranging from grocery bills to inflation and interest rates.
Brent crude traded near the $110 per barrel mark on Friday, having previously broken the $100 barrier earlier in the week. This is linked to the ongoing conflict in the Middle East, which destabilizes global oil markets.
The impact of rising oil prices goes far beyond gasoline and diesel. Since South Africa imports a significant portion of its crude oil and petroleum products, a sustained oil shock could increase the country's import bill and potentially put additional pressure on the rand exchange rate.
A weakening rand, in turn, will lead to an increase in the cost of imported goods and raw materials, creating another source of inflationary pressure.
Pressure on households
Investec economist Lara Hodges noted that a substantial increase in fuel prices in September will place an additional burden on already strained household budgets. The projected increase in October will further reduce purchasing power.
Hodges stated: "Consequently, consumer sentiment is likely to remain extremely low in the third quarter, as households are expected to adopt a more cautious approach due to concerns about affordability and the overall economic outlook."
This effect does not only affect drivers. When households are forced to allocate a larger portion of their income to fuel, transport, and other necessities, they have less money left for restaurants, entertainment, clothing, and other non-essential spending. This can trigger a secondary effect for businesses dependent on consumer spending, especially during a time when the South African economy is already struggling to gain momentum.
Food prices face a new test
Higher diesel costs will also create additional pressure on the food supply chain. The Road Haulage Association reports that fuel accounts for approximately 35% to 55% of operating costs for road transport companies. Based on the increase in diesel prices in September, this could lead to an overall increase in freight operating costs of about 4%–6%, although the final outcome will depend on how much the operators, suppliers, and retailers absorb this increase.
Over 80% of land transport is carried out by road, and trucks play a crucial role in moving food between farms, processors, distribution centers, and retail points.
However, this does not mean that supermarket prices will rise by almost the amount of the diesel price increase. Transport is only one component of the final price paid by consumers, and operators can also use fuel adjustment mechanisms in contracts to recover some of the additional costs.
There are also factors currently favorable to consumers. Investec Chief Economist Annabel Bishop reported that South Africa is still in a period of deflation in agricultural food prices, although the potential impact of El Niño-related weather may become a more serious issue towards the end of the year.
The interest rate problem
The oil shock could also complicate the South African Reserve Bank's efforts to balance inflation and weak economic growth. Investec Chief Economist Annabel Bishop emphasized that the protracted conflict in the Middle East combined with oil prices above $100 per barrel will negatively affect South Africa's inflation and interest rate forecasts.
Bishop noted: "The persistence of the war in the Middle East and oil prices above $100 per barrel will negatively impact the inflation and interest rate forecast, and now another interest rate hike of 25 basis points this year is possible for South Africa, although the prospects in the Middle East are uncertain."
SARB has so far maintained a cautious approach to the oil shock and its impact on inflation. It raised interest rates by 25 basis points in May but kept them unchanged at the MPC meetings in April and July.
Bishop added: "At the upcoming MPC meeting this month, SARB may raise the rate by 25 bps as the oil shock has intensified again, which could affect inflation if it persists. The MPC meeting this month will take place on the 23rd, and much will depend on the movement of oil and rand prices."
The current target rate is 7%, and the prime lending rate is 10.5%. At the last MPC meeting, votes were split 4–2, with two members advocating for a 25 basis point rate hike.
Business feels the pressure
A broader oil shock could also affect sectors that heavily rely on diesel fuel, such as mining, construction, and infrastructure, while higher international prices for oil and aviation fuel may put pressure on air travel costs.
However, perhaps the biggest problem for the entire economy is the cumulative effect on consumers. If households are forced to spend more on fuel, transport, and food, there is less money left for non-essential purchases. This could put additional pressure on businesses dependent on household spending, adding another potential brake to an economy that is already struggling to gain momentum.
