We can all agree that there’s a cost-of-living crisis, and as we try to stay afloat, it’s important to understand how inflation affects living standards. FNB Senior Economist, Koketso Mano enlightens that the world has suffered from a post-lockdown cost-of-living crisis driven initially by supply- demand misalignment and exacerbated by the war in Ukraine. “Supply chain bottlenecks have since subsided, but inflationary headwinds persist. These headwinds include tight labour
markets in advanced economies like the US, climate change, as well as the reconfiguration of investments and business operations in attempts to strengthen post-pandemic supply chains and in response to escalated geopolitical tensions.” Furthermore, these global factors have spilled over to South Africa’s inflation dynamics through the ports and have been compounded by a weaker rand. Tighter global financial conditions and rising debt vulnerabilities have generally lifted the risk associated with emerging markets assets, weighing on currencies. “In addition, the rand has suffered from political risks and stunted growth given crippling infrastructure constraints. As a result, the rand has underperformed relative to peer currencies. The weaker rand, failing infrastructure, and poor service delivery has lifted the cost of operating and living in South Africa, worsening SA’s inflation trajectory,” she says.
Glamour: In light of this, what are the three main factors that contribute to inflation?
Koketso Mano: Generally speaking, supply-demand misalignment (supply shortages or excess demand) across the globe, a weak exchange rate, and poor service delivery that pushes businesses and households to procure or augment basic services privately.
In terms of the Consumer Price Index, the initial uplift in fuel inflation has now unwound and its steep deceleration (in deflation in June 2023) has supported lower headline inflation. Unfortunately, food and core inflation are expected to be more stubborn but do not undo the slowing in headline inflation, which is expected to ease from 6.9% in 2022 to 6.0% this year.
G: Can you please explain the relationship between inflation and interest rates?
Koketso: By moving the repo rate, monetary policy affects other market interest rates, the exchange rate, liquidity in markets, asset prices as well as inflation expectations. With a transmission lag of around 12-24 months, the impact of policy moves eventually influence spending and investment decisions. The current hiking cycle would have resulted in tighter lending standards, less liquidity in markets, less credit demand and extension. This eventually dampens household consumption and investments, albeit the current cycle will be different as investments will be driven by critical energy-related spending. As household consumption slows, the pricing power of business (including the power to pass through prevailing cost pressures) is limited, arresting inflation. Also, higher interest rates tend to attract capital inflows, after adjusting for the risk associated with local assets, and supports a stronger currency which reinforces lower inflation. That said, monetary policy is more productive in addressing demand- driven inflation. Given that current inflation is more supply- driven, monetary policy has had to focus on second-round effects instead – the passthrough of initial supply shocks to the broader basket of goods and services. For example, when fuel inflation spikes, the cost of transport rises and lifts input costs for business which is often passed to the consumer. To avoid price and wage setters planning for and embedding what could be temporarily excessive inflation, the central bank has had to be credible, convincing these agents that the target of 4.5% will be achieved over a two-year horizon.
G: Would you say SA is experiencing spiralling inflation at the moment?
Koketso: No. Although we anticipate that a third of the inflation basket will average above the 6% upper target limit this year, and 83% is rising relative to 2022, we predict that those proportions will fall to around 25% and 42% next year. In any event, headline inflation has already softened from a peak of 7.8% in July 2022 to 5.4% in June 2023 and is expected to slow from an average of 6.0% this year to around 5.0% next year. Furthermore, while average surveyed inflation expectations across business, trade unions and analysts to the year 2025 remain above the reserve bank’s inflation target of 4.5%, wage growth expectations have slowed. This is in line with weak growth and employment prospects, indicating the reduced risk of a wage spiral that would have maintained upward pressure on interest rates.
G: Low-income households are greatly affected by inflation, is there a way around it?
Koketso: The central bank contends that price stability is in the interest of the purchasing power of the poor or low-income households. Without low and predictable inflation, budgeting, and the ability to optimise spending would be impaired, making price stability a key contributor to sustainable growth. Inflation was anchored around the 6% upper target limit from the time that the inflation- targeting framework was adopted in SA in the year 2000 until 2017, when the Monetary Policy Committee started speaking to their preferred 4.5% anchor. Since then, and apart from lockdown effects, inflation has been better anchored around 4.5% and interest rates have also been lower. While there is a case of having to endure the higher inflation at this stage, there are ways that one can get through the tough times. Included in this are some small tricks that one can do, such as looking at where spending is going currently and if there is a way to reduce spending on wants and redirect to needs and looking for specials when shopping.
If you are struggling with your debt position, chat to your service provider to see if they can assist in potential restructuring the debt which could free up some cash flow which could be used to pay off the debt sooner.
G: With consumers losing purchasing power, how can the economy be sustained?
Koketso: We expect virtually no growth this year, with the most support coming from investment into energy supply. Export growth will be constrained by lower global demand and local logistical issues, while household spending growth will be weighed down by a higher cost of living. It is important to note that some households would have benefitted from the higher interest earned on savings and investments, but these households usually have a lower propensity to consume. Some households will still be taking up consumption-related credit like credit cards, but these will be more expensive lines of credit and may delay the recovery in household spending while credit standings are being repaired. Ultimately, the importance of structural reforms is highlighted by the outlook over the next 3 to 5 years.
With more traction on these reforms, more private-sector participation, improved competition and productivity, greater investment in human capital as well as lower inflation can be generated over time.
G: Lastly, what would you like South Africans to know from an economic perspective as we navigate these trying times?
Koketso: We are navigating a time of weak growth, elevated inflation, and high interest rates. Unfortunately, geopolitical tensions and climate change mean inflationary pressures stay will with us for some time and interest rates will likely remain higher for longer as a result. In line with monetary policy, fiscal policy is encouraged to stay the course of consolidation and avoid adding upward pressure to interest rates. Should political weight remain behind structural reforms, South Africa can build a more productive economy with robust growth and an inclusive labour market.
Product Head of FNB integrated Advice, Ester Ochse Weighs In
G: How else can ordinary South Africans manage the impact of it?
Ester Ochse: There is a huge impact on ordinary consumers with the rising interest rates as well as inflation. The best way that one can get around it is to get back to basics. Check what they are spending the money on, the best way to do this is to track spend for a period of one month. Every time money is spent, be it cash, credit or debit order, make anoteofitoruseanapplikeTrackmy Spend on the FNB App. Then one can see where exactly their money is going. After that look if there is a way that one can reduce on certain spending categories and redirect to the important or needs spend. For example, if you are spending on eating out and treats, can you reduce that and put towards paying off expensive credit. Paying off expensive credit quicker will free up more cash flow, which can in turn be used to save or invest. Also leveraging off loyalty programmes which will free up cash as well that can be used towards paying off expensive debt. The good side to a higher interest rate environment is that savings earn more interest, so extra funds in a savings account should earn more interest.
G: Is it realistic to encourage people to save when salaries aren’t keeping up with the inflation rate? Or is it possible?
Ester: As mentioned above, with the higher interest rate environment, money in a savings account will earn more interest. So, it’s a good time to build up an emergency fund. There is also a common misconception that one needs to have lots of money to save, but that is not true, even putting away R50 a week (the price of a hamburger) will make a difference. That is why it is critical to look at where one’s money is going and look at where one can free up cash by reducing spend on “want spend” (treats, eating out, clothing, grooming) and then using that feed up cash to put towards savings.
Esther’s Top 5 Tips for Surviving the Current Economic Climate
- Draw up a budget and track your spend
- Use loyalty programmes to free up cash
- Do meal planning to reduce unconscious spending on frequent trips to grocery stores.
- Don’t cancel insurance policies
- Stay the course with your savings and investment journey despite market volatility.
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