Investec expects consumer inflation to average 4.5% in 2024, lower than the South African Reserve Bank's forecast of 5%.
This should reassure consumers after years of brutally high inflation and rising interest rates. The repo rate, which sets the tone for all other interest rates, rose from 3.5% in 2021 to its current 8.25% and is expected to start falling in the coming months.
In a recent Investec Focus Radio SA podcast, Investec Chief Economist Annabelle Bishop reflected on when inflation and interest rates will fall and what consumers can expect when it comes to taxes, salaries, food and fuel costs. .
Listen to Annabelle Bishop's full podcast here.
food prices should fall
The decline in inflation will provide some relief from soaring food prices, which account for about 20% of the consumer price index basket. Fuel is another variable as it is priced in US dollars. The third factor that affects the basic cost of living is the rand. The rand has been volatile and is likely to continue to do so in the run-up to the election.
The good news for food prices, Bishop said, is that more rain is coming in many parts of the country, giving farmers, especially those involved in summer crop and cattle production, a bumper harvest.
“Along with the decline in international food prices, these factors could result in food price inflation moderating and potentially lower than the Reserve Bank's expectations,” she added.
Reprieve at the pump?
Whether consumers see lower prices for petrol and diesel depends on several factors, including the volatility of the rand and the fact that oil prices are in US dollars.
Fuel prices in South Africa are influenced by OPEC+ (Organization of the Petroleum Exporting Countries and its allies), which has reduced supply to the market to increase profitability due to concerns over the future phase-out of fossil fuels. It has controlled oil prices by pushing up prices. .
However, Bishop said in a recent note that Brent oil prices have been relatively subdued so far this year, and he expects oil prices to remain subdued in 2024 due to increased production in non-OPEC+ countries. .
This could mean South Africans have less money to pay at the pump, but he warns that oil prices could become volatile again if geopolitical conflicts escalate.
Salaries are not keeping up with inflation
Declining real wages have led to a decline in consumer purchasing power, contributing to South Africa's economic slowdown.
Businesses have had to invest in alternative power sources to combat load shedding, and Transnet's rail and port issues have further reduced business profitability, which is impacting on salaries, Bishop explains. .
“People whose salary or wage growth rate is less than 6% will not be able to keep up with inflation, which means, in real terms, that they will be able to buy less with what they earn. Unfortunately, this is likely to remain the case until we see a significant decline in inflation and interest rates,” Bishop said.
Tax rates are likely to remain unchanged
Mr Bishop added that the government was unlikely to raise corporation tax, personal income tax or value added tax (Vat) in the next budget, especially in an election year. That means it will have to rely on more borrowing to finance its spending programs. And with voters heading to the polls in the coming months, spending cuts are unlikely to have much of an effect.
“The government isn't looking to raise revenue by increasing taxes. It's not going to cut spending in an election year. Instead, it's going to increase debt,” she says.
“South Africans are not very frugal”
South Carolina's savings market is highly skewed, with businesses being big savers and households not so much. The government, on the other hand, is a net saver and borrows more each year through bond issuance to finance its budget.
COVID-19 and other factors have increased the economic vulnerability of South African households, with rising interest rates increasing the cost of servicing debt and inflation eroding salaries and further hampering their ability to save.
Inflation and an improving interest rate environment mean lower returns for savers and relief for borrowers. But while lower interest rates will take away some of the appeal of savings, households should have more savings to invest at the end of the month.
“Looking ahead, interest rates and inflation may ease, and stronger economic growth, coupled with improved government policy, could lead to higher savings,” Bishop says.
But what we really need to have a positive long-term impact on savings is a 5-6% growth rate that significantly lowers unemployment and drives the economy, she says.
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