Inflation: the good news and the bad news
South Africa beat England in World Cup games in cricket and rugby last week. The latter, a semi-final match-up, was a nail-biter that the Boks managed to win despite an overall subpar performance.
There was similarly good news and bad news in the latest South African inflation data. The bad news is that the consumer price index was 5.4% higher in September compared to a year ago. This is up from the 4.8% annual increase in August.
The big culprit is fuel prices, though food inflation also remains stubbornly high. The inland price of 95 unleaded petrol jumped by R1,71 per litre in September to a 13-month high of R24,54. This means the transport category contributed 0.6 percentage points to the 5.4% annual CPI increase.
October saw the petrol price jump another R1,14 per litre to R25,68. This is 14% higher than a year ago. However, despite the oil price volatility in the wake of the explosion of violence in Israel and Gaza, we are on track for a fuel price cut of almost R2 per litre next month.
Longer term, the petrol price is unpredictable. We do not know what the oil price is going to do in the days ahead, much less where it will be a year or two from now. It adds noise to the local inflation rate but tells us little about underlying price pressures. The oil price can remain high at $91 per barrel, but if it doesn’t rise any further, the rate of change drops to zero. Inflation doesn’t measure whether things are expensive or not, but how fast prices are changing. Price changes of a single item like fuel is also not what we mean when we talk about ‘inflation’. Rather, we are referring to an increase in the broad price level of goods and services.
Underlying inflation therefore has much more to do with the behaviour of consumers and companies in South Africa than volatile global energy prices. What matters more is whether firms pass cost increases on to consumers, and whether consumers accept these. This in turn depends on what people expect future inflation will be, the extent of the pricing-power held by firms (which is usually inverse to how much competition there is), and overall demand.
That is why economists like to look at alternative measures of inflation, like core inflation, which excludes food and fuel prices. Of course, fuel and food prices matter greatly to consumers. We all need to eat and move. However, core inflation is a better indicator of whether underlying price pressures are increasing or abating. This is where the good news comes in. Core inflation declined to 4.5% year-on-year in September and is now in line with the Reserve Bank’s target.
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