Diesel goes from R17.58 per litre to R31.88 per litre in three months

Diesel prices will have risen by 79% over the past three months when the next price hike takes effect on 6 May, with significant consequences for inflation and interest rates. 

This rise in absolute terms is just below R14 per litre, with diesel 0.005% sulphur rising from R17.58 per litre at the end of January to R31.88 per litre from 6 May. 

Stanlib chief economist Kevin Lings said there is simply no avoiding this price hike, with it likely to ripple throughout the economy.

Lings explained to 702 that there is very little the Reserve Bank can do about this type of inflation, as its tools are limited to reducing demand rather than increasing supply. 

Simply put, the Reserve Bank cannot drill for more oil or increase refining capacity. All it can do is slow spending to prevent high inflation from becoming entrenched. 

Lings expects inflation to rise from the current 3.1% level to over 5% when April’s data is released later this month. This will not include the second huge hike in petrol and diesel prices instituted from 6 May. 

Worryingly, inflationary pressures are likely to get worse as the conflict in the Middle East is prolonged and government relief programs come to an end. 

In the worst-case scenario, inflation could rise to 7% or more if oil prices remain elevated and the government’s relief measures end. 

This will push the Reserve Bank to act by hiking interest rates, which will slow consumer spending and economic growth. 

“If you look at the diesel price over the past three months, including the hike on 6 May, it is up 79% in just 90 days. That is a monster increase,” Lings said. 

“Obviously, that has to feed into a price effect somewhere in the economy and most likely throughout the economy.” 

“We are not capturing any of that. None of that is being captured in the current inflation data. Clearly, if you get further increases, it will just push inflation even higher.” 

The real concern is beyond petrol and diesel

Given the Reserve Bank’s limited ability to address the rise in petrol and diesel prices, which are temporary shocks, it tends to focus on second-round effects. 

These effects are typically price increases in other parts of the economy where businesses can no longer absorb rising costs and pass them on to consumers. 

Lings explained that this is a situation that will concern the Reserve Bank, as it likely means inflation will remain higher for longer. 

“The key is how much of the fuel price increases will show up in wage demands and food prices, for example. I have to believe that some of it will,” Lings said. 

“If you look at where Eskom’s salary increases came out, it settled at 7% each year for the next three years. That is double the inflation target.”

Lings said Eskom’s workers’ salary demands are the canary in the coalmine for the types of demands to come from other workers in the economy. 

As the cost of living rises, Lings said other workers will feel the pinch and demand higher wage increases to get by. 

This will result in wage inflation, which is far more sticky and prolonged than fuel price inflation and something that interest rate hikes play a role in negating. 

“All of this feeds into more persistence in high levels of inflation at the same time the Reserve Bank is trying to get this under control,” Lings said. 

“It is not a good scenario. The Reserve Bank has little it can do other than hike interest rates. These work with a lag and are a blunt instrument.”

Lings said interest rate hikes are not particularly effective at tackling this kind of supply-side inflation, but they can temper wage demands and rising prices in other parts of the economy. 

“We are set for an awkward phase of inflation that we hope will not get out of control, and in order for that to happen, you need the war to end soon and the oil price to fall,” he said.

Reserve Bank Governor Lesetja Kganyago is well aware of this, telling attendees at a public lecture at Rhodes University that the bank has little control over fuel prices. 

“First-round effects are directly linked to the shock and happen fast: the oil price goes up, and then petrol and transport get more expensive. Monetary policy cannot do much about this,” Kganyago said. 

“Our interest rate tool does not change global oil prices – and it also operates with a lag: if we move rates now, the main effects on the economy play out next year.”

“This timeframe means you cannot do much about inflation that is suddenly going to be higher next month. It is not in the window that is relevant for monetary policy.”