Inflation challenge: Don’t worsen it through ill-informed short-term interventions.

By Professor Bonke Dumisa

The world is currently battling to deal with inflation pressures that can be traced back to various factors, which are mostly external in nature, including the unfortunate Russian Invasion Of Ukraine on February 24 2022.

How did the Russian invasion of Ukraine worsen global inflationary pressures? When Russia invaded Ukraine, the USA and its allies quickly advocated for the total boycott of any type of trade with Russia, including oil and gas. This created global jitters about a lower global supply of crude oil, which saw the Brent crude oil price moving from an opening price of $97.14 per barrel on February 23, 2022 to a closing price of 102.37 per barrel by the following day. These sharp increases in Brent crude prices escalated as high as $140 per barrel within two weeks. To be exact, the opening Brent crude oil price was $131.50 on March 9 2022.

The unexpected quick rise in Brent crude oil prices immediately had negative multiplier effects on petrol and diesel prices globally. This directly led to many successive upwards fuel price adjustments in South Africa from March 2022 onwards. The South African government temporarily tried to subsidise the South Africans by foregoing about R1.50 per litre, which was due to the government through the fuel levies. This was unsustainable, and it had to end in a matter of a few months.

The Russian boycott had many other direct global negative consequences. Many food exports from Ukraine were directly negatively impacted by the Russian invasion. By the same token, the boycott of Russian products led to lower supply of many products which, in turn, pushed up the prices of many essential food prices globally. For example, this saw the prices of cooking oil in South Africa jumping from as low as R75 per 2 litre container to as high as R140 per 2 litre container in a matter of a few weeks.

All these global factors were responsible for the sharp rise in global food inflation, which has ultimately led to the current food inflation of as high as 14% in South Africa.

What worsens the food inflation in South Africa is that as much as over 90% of our food supplies are transported by road, hence the many fuel price increases in the country have directly pushed up the food prices and the cost of doing business for most businesses involved in either food production and/or in food distribution.

It is important that we now look at the inflation rates of five countries, including South Africa:

The inflation in South Africa was inside the South African Reserve Bank target inflation rate range of 3-6% before the Russian invasion of Ukraine; and it gradually increased to 7.8% by the end of 2022. It subsequently decreased to 7.6%, then to 7.4%, then to 7.2%, then to 6.9%. We were all excited when the South African inflation reduced to 6.9%, hoping it was soon going to go back to inside the SARB target inflation rate range of 3-6%. It was not to be. The inflation rate rose back to 7%, then 7.1% and now at 7.2%.

The SARB’s eagerness to keep the inflation rates low, has seen the South African repo rates from as low as 3.5% in October 2021 to the current repo rate of 7.75% today. To them, it was immaterial that most of our domestic inflation was effectively due to imported inflation due to the factors mentioned above.

Meanwhile, the current inflation rate (CPIH) in the UK, which is one of our largest trading partners, is 12.7%, coming down from 13.7%; yet their unemployment rate is only 3.8%.

The current inflation rate in the European Union is 8.3%, coming down from 9.9%, yet their unemployment rate is only 6%. The USA's economy is buoyant despite all the global jitters about a possible global recession. The USA created over 250 000 jobs in April 2023. Their inflation is expected to reduce to 5% soon, having been far above 8% at the beginning of this year; yet their unemployment rate is only at 3.4%, with most of those unemployed people in the USA being said to “not actively looking for employment.

It is much easier for the USA, the United Kingdom, and the European Union to ameliorate the negative effects of these very high inflation rates on the poor and the unemployed because of their very low unemployment rates; hence them not much civic upheavals there due to rising costs of living, even though we saw some significant nationwide wage strikes in the United Kingdom which the government simply ignored.

The situation is different in South Africa, where administered prices, including electricity rates and water rates and local government property rates, have contributed a lot to the rising cost of living. The negative multiplier effects of Eskom’s load shedding, which is destroying businesses and jobs, means increasing unemployment rates, where our expanded unemployment rates are already above 44%.

South Africa has been in junk status for over three years already, with our Debt-to-GDP levels already above 70%. Under these circumstances, the South African government effectively has absolutely very little it can do to ameliorate the burden of rising costs of living on its citizens. It is precisely for these reasons the government could not meet the double-digit wage increase demands by the public servants. But, this may be the time to trim its bloated national Cabinet, among other things.

Prof. Bonke Dumisa is an independent economic analyst