It is hot in South Africa. The hottest it has been in decades. The impact of El Niño is an uncontrollable factor that the country is dealing with and comes as a blow to the consumer inflation outlook.
The heat is disrupting agriculture, after weak production in 2023. Food prices have been a major contributor to the stubborn CPI (consumer price index) inflation rate. In the February report, food prices contributed a notable 1.1% of overall inflation. With the prevailing weather conditions, it suggests that food prices will remain on the rise for much of the year. CPI inflation reached 5.6% in February 2024, the fifth consecutive reading above 5.0%, showing amber on the ceiling of the Reserve Bank’s target range.
It is not just the weather that has become unbearable. The high interest rate environment is adding to the heat and is being felt across the economy: the National Credit Regulator has reported a rising number of credit application rejections and a rise in credit impairment in its latest “Consumer Credit Market Report”. Retail sales contracted further in the first month of 2024, maintaining the trend of 2023, and motor trade sales growth was weak. If it has not been said enough times already this year, pressure is on in this economy, where household consumption expenditure accounts for around two-thirds of GDP.
When inflation is driven by exogenous factors, it often triggers that age-old debate about monetary policy and inflation targeting. It is (now) a global lament: what is the use of hiking rates if it hardly moves inflation and just erodes disposable income, harming the economy? In Pretoria, Sandton and Cape Town it is an academic or ideological debate, but at the household level across the country it is more of a socioeconomic, and even political, trigger. I raise this point to highlight how easy it is for one thing, such as climate change, to trigger multifaceted risks and tensions in the economy that cannot handle another degree of tension.
The lever that may not be getting much attention in the South African context, is that of responding to climate change
Scarcity and pricing go hand in hand. And enough scarcity triggers social instability. Developed economies did one other thing than hike rates when prices spiked unexpectedly in the midst of Covid and then later in response to geopolitical conflict: they deglobalised by looking to insource as much as possible. It’s a valuable solution if you can internally produce everything the country needs, until the sun comes along and dries up all the food. Most countries, however, cannot completely deglobalise even if they wanted to. South Africa is one of them.
Managing prices is complex, but if we view it more as managing scarcity there are so many more levers than monetary policy and inflation targeting: managing the exchange rate plays a role, trade relations play a role, stimulating the internal economy plays a role, and so does addressing (or at least planning) for climate change. Maybe what we need is a more co-ordinated effort around these levers.
The lever that may not be getting much attention in the South African context, is that of responding to climate change. Ask anybody if they’d have another coal power station tomorrow or what many view as the experimental renewable energy solutions under way, and you can guess the answer. This kind of thinking goes beyond the power situation; too many South Africans are burdened with the struggle of meeting their immediate needs: food, housing, energy and transportation (driven by fuel prices).
These are all major drivers of consumer inflation today because their supply has been disrupted in one way or another: food by climate and animal disease; housing by rapid urbanisation, interest rates and natural and unnatural disasters; energy by poor infrastructure planning and maintenance at Eskom; and transport by the exchange rate and oil production interruptions. They also all have some level of environmental impact, which directly and negatively affects a range of basic necessities when unmanaged, resulting in higher prices for those basics in future.
As the saying goes, it is difficult to see the future when you are hungry today. But if there is one lesson we are learning from our energy crisis, it is that failing to have foresight makes today’s problems worse tomorrow. Is business doing enough? Is the government doing enough? And are we doing enough to make our communities appreciate the importance of sustainability to our socioeconomic longevity?
• Makhoba is an economist, and the lead specialist of research and analytics at Liberty, the insurance and asset management arm of Standard Bank.
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