Lower oil prices may ease inflation pressure, but households should not expect immediate relief

CONSUMERS

The US and Iran peace framework has helped drive oil prices lower, offering hope for reduced inflation and possible rate cuts, but household budgets remain under strain.

Image: Mario Tama / Getty Images via AFP

South Africa's annual inflation rate accelerated to 4.5% in May, driven largely by higher fuel prices and rising transport costs, but economists believe a recent decline in global oil prices and a strengthening rand could help ease price pressures in the months ahead.

The latest Consumer Price Index (CPI) data from Statistics South Africa showed inflation rising from 4% in April to 4.5% in May, with transport costs increasing 9.4% year on year and housing and utilities climbing 5.3%.

Fuel prices were 28.7% higher than a year ago.

The increase came as motorists and businesses absorbed the impact of rising diesel and petrol prices, compounded by earlier rand weakness.

Frank Blackmore, lead economist at KPMG, said the inflation outcome was broadly in line with market expectations.

"The main inflationary number came out this morning at 4.5%, which was in line with the expectation for the market given we had seen a larger increase in the prices of fuel, diesel and petrol in particular over this month and a deterioration of the rand," Blackmore said.

He noted that transport costs had become one of the largest contributors to inflation.

"The combination of this has meant that transport is contributing 1.3 percentage points out of the 4.5%, which is the same now as housing and utilities given the many increases we've seen in both electricity and water prices at 1.3 percentage points each," he said.

The inflation data comes against a rapidly changing global backdrop.

Oil markets have fallen sharply following the signing of a peace framework between the United States and Iran, which includes plans to reopen the Strait of Hormuz and restore oil flows through one of the world's most important energy corridors.

Oil prices have dropped below $80 a barrel this past week as traders anticipate increased supply and fewer disruptions to global shipping routes.

Blackmore said the easing in oil prices and the recovery in the rand could help reverse some of the inflationary pressure experienced earlier this year.

"The good news is that given the ceasefire and the agreement that appears to have been reached, the prices of oil have come down significantly, the rand has strengthened, which means we can have a reversal of these high price increases that we saw in a month like May," Blackmore said.

He added that inflation could gradually move closer to the South African Reserve Bank's target range if no major economic shocks emerge.

"Taking that pressure off inflation and letting us end the year on somewhat higher than the target high months of inflation, but probably somewhat in line with the target towards the end of the year if other economic shocks don't come," he said.

The improving outlook could also influence monetary policy.

"That will also mean that the South African Reserve Bank (Sarb) will consider by the fourth, maybe even the late third quarter, reducing interest rates in light of that inflationary expectation coming down," Blackmore said.

"We might end the year at a better point than we started it in terms of the official policy rates, which is good for lenders. It's also good for both consumers and businesses in that the cost of capital is again seen to be coming down, and therefore this could be a further boost to economic growth."

However, while the macroeconomic outlook may be improving, financially strained consumers should not expect immediate relief.

Neil Roets, CEO of Debt Rescue, cautioned that lower fuel prices take time to filter through the economy.

"Consumers are only now beginning to experience the full impact of the fuel price increases that occurred earlier this year. There is often a significant lag between fuel price movements and their effect on household finances," Roets said.

He explained that rising fuel costs ripple through supply chains long after the initial increase at the pumps.

"When fuel prices rise, transport operators, suppliers, manufacturers and retailers absorb those costs and gradually pass them through to consumers. Even if fuel prices come down, those higher prices do not automatically reverse. Businesses first need to recover the higher costs they have already incurred."

Roets said households had spent months absorbing higher fuel costs alongside electricity tariff increases, municipal rate hikes and elevated borrowing costs.

While lower oil prices could help moderate inflation over time, he warned against assuming that the pressure on household finances has already passed.

"The encouraging development is that the pace of pressure may begin to slow if lower oil prices are sustained. The mistake would be to confuse that with relief already having arrived," Roets said.

"Consumers remain financially vulnerable, and it will take sustained improvements over time before many households notice a meaningful difference in their disposable income."

Roets added that recent developments should be viewed as a possible turning point for fuel markets rather than a turning point for household finances.

For now, economists agree that the combination of lower oil prices, a stronger rand and the prospect of lower interest rates offers a more encouraging outlook for the second half of the year, even if consumers may have to wait a little longer to feel the benefits in their wallets.

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