Pliability: ‘Supple enough to bend freely or repeatedly without breaking.’ This is the definition according to the Merriam-Webster dictionary. It is a term frequently used by analysts of the economy, that has just barely managed to keep its head above water over the last decade despite electricity shortage, widespread corruption, and just over two-year battle against a pandemic.
While we adapt and adjust to the recent increase in the repo rate by 75 basis points, consumers in South Africa will be relieved in the coming months as economic indicators point to food price inflation stabilizing and end-of-month data from the Central Energy Fund indicating a likely petrol price cut within the month of September by between R1 and R1,10, while diesel prices rise. Locally, the most direct pressure point is the cost of petrol, which is felt by all segments of society. Petrol increases have a knock- on effect on consumers in the following ways:
- Motor vehicle operating costs: Vehicle owners will immediately feel the impact and will have to pay more to fill up their tanks.
- Transportation costs: As fuel prices rise, the cost of operating bus and taxi services rises. These expenses are passed on to the customer.
- Consumer goods: An increase in the cost of consumer goods leads to an increase in logistic costs. An increase in logistic costs is typically passed on to the consumer, resulting in a higher cost of goods for the South African.
- Higher fuel prices lead to higher inflation, which may lead to interest rate increases. Higher interest rates will hurt bonds, and while cash rates will rise, they may not be enough to offset the impact of higher inflation.
- Higher interest rates are generally negative for equities due to the way they are valued. However, higher interest rates and inflation are particularly harmful to consumer stocks for the reasons stated above. In the equity market, there are some notable exceptions, such as banks, which perform well in higher interest rate environments.
On the other hand, any decrease in the cost of fuel, particularly larger decreases, will benefit transportation costs and supply chains. The effects on the logistics chain should be felt in the coming quarter, making life a little easier for consumers by the end of the year. In addition, the local tourism industry should benefit. Paying less for fuel will go a long way toward lowering inflation as well as the cost of logistics within South Africa, which is one of the key drivers of the inflation basket items. Diesel prices are expected to rise by between 25 cents and 31 cents per litre. The rise in diesel demand and subsequent price increases will be passed on to consumers, not only in terms of filling one's own car, but also in the goods produced by diesel-reliant manufacturing.
As consumers have more disposable income, businesses will benefit indirectly. This should stimulate demand/spending to the entrepreneur's benefit and assist business owners in increasing their turnover. Business owners should keep in mind that the fuel price decrease cannot be viewed in isolation because other factors, such as the current electricity crisis, are also at work.
