Inflation will be a problem for many years

Inflation will remain elevated for years to come due to South Africa’s uncompetitive macroeconomic environment and structural issues such as load-shedding and deteriorating logistics infrastructure. 

Efficient Group chief economist Dawie Roodt told The Money Show that despite a decrease in global inflation, South African prices would remain higher for longer due to internal issues. 

“Global good prices are coming down, but that does not apply to South Africa as we have major local issues,” Roodt said. 

These issues do not only keep food prices high but will raise the cost base of the entire economy as the country has significant problems with network industries that are universal inputs. 

Chief among these is the electricity crisis which affects every part of the economy as all industries require electricity to function. 

South African food processors told Reuters they are spending millions of rands to mitigate the effects of load-shedding, water supply issues, and deteriorating infrastructure. 

Tiger Brands has allocated R120 million for the second half of 2023 to backup power and water solutions, including generators, solar panels, and water storage. 

The company has even begun supplying municipalities where its factories are located with generators to ensure they remain operational during load-shedding. 

Companies are unable to absorb these costs indefinitely and will eventually pass them on to consumers.

Moreover, the expenditure on backup power and water solutions comes at the expense of capex for growth. 

This is bad for economic growth and inflation as these companies are not increasing their capacity and supply of goods, which may result in a supply-demand imbalance in the future. 

Intermittent water supply is increasingly becoming a significant problem for South African companies. 

These issues raise the cost base of the entire economy due to their universal application. They also raise the prices from farms to retailers. 

Another factor that raises prices universally is a weak exchange rate. Roodt said that the decrease in the rand’s value would gradually filter through to higher prices. 

Thus, inflation will probably come down in the next few months, said Roodt, but the longer-term inflation outlook is not good. 

“Headline inflation will probably accelerate in a year or two’s time because of South Africa’s structural issues.” 

Food inflation will decrease due to a high base effect, but Roodt cautioned that food prices will remain volatile in the short term and probably remain high over the long term.