South Africa’s high petrol prices have one positive

South Africa’s high petrol prices are deflationary as they reduce consumers’ disposable incomes, cutting spending on other goods and services and limiting price increases. 

This is feedback from Old Mutual chief economist Johann Els, who said inflation will continue to be higher for longer. 

Petrol and diesel prices in South Africa have risen steadily throughout 2024. Petrol prices rose in May, while diesel saw a slight decrease. 

Data from Standard Bank chief economist Goolam Ballim showed that petrol prices have risen over 50% in the past two years. 

This has been a major driver of inflation, with fuel being a universal input in the economy – raising its cost base. 

However, Els explained that high petrol prices can also have a deflationary effect by reducing the prices of other goods. 

While rising petrol prices drive inflation to an extent, they also take up more of consumers’ disposable income. 

This results in consumers spending less on other goods and services, reducing their price increases as demand declines. 

He said this can be seen in the data. While petrol price increases have kept overall inflation high, inflation in other consumer goods has eased substantially. 

Between March and April, the weighted average inflation for consumer goods such as clothing, footwear, furniture, appliances, and vehicles declined from 4.2% to 3.5%.

“The recent petrol price increases have had a deflationary effect by limiting consumers’ disposable income, which in turn reduces spending on other goods and services, limiting their price increases.” 

He further explained that this phenomenon is not new, noting that consumer goods inflation was in negative territory in 2010-2011, and during 2017-2019, it was below the lower end of the target range while petrol prices were rising.

Government driving inflation

Government spending and repeated above-inflation increases for administered services such as water and electricity supply have kept inflation elevated. 

This is feedback from Old Mutual Wealth investment strategist Izak Odendaal, who said there are several local reasons that have kept inflation and, subsequently, interest rates elevated. 

Chief among these are the significant increases in government-administered services, which have run well above headline inflation over the past decade. 

Administered services range from electricity tariffs to municipal charges and have a significant impact on inflation as many of these services are universal inputs in the economy. Thus, when the price for these services rises, the entire cost base of the economy rises, too. 

In particular, steep annual upward adjustments in electricity tariffs and municipal charges have driven overall administrative services inflation. 

The government has also given generous above-inflation wage and salary increases to its workers over the past decade. 

Meanwhile, government inefficiencies, especially local government, significantly raise the cost of doing business. 

“A renewed commitment across government entities to adhere to its own inflation target will go a long way to achieving it,” Odendaal said. 

The rise in administered prices is shown in the graph below.