The cost-of-living squeeze: prices rise quickly and fall slowly

In South Africa, a simple Saturday morning trip to the grocery store reveals the true state of the economy. Buying R100 worth of groceries this year results in fewer items than last year. The rising price of Brent crude oil, now above US$100 a barrel, has been met with warnings and upward trends on graphs. For those spending R100, the impact is less dramatic but more permanent than the headlines suggest.

The mechanism behind price increases in South Africa is straightforward. Most of the country's fuel is imported and purchased in dollars, so the pump price depends on two factors: the international cost of refined fuel and how many South African rands are needed to buy a dollar. Adding taxes and levies, which make up about a third of your total cost, and regulated margins, we arrive at the final price.

This price increase then impacts the economy, including minibus taxi fares, which rose by 11.5 percent between May and June.

Many different numbers are often thrown around when discussing inflation, including headline inflation, core inflation, CPI, food inflation, medical inflation, and school fee inflation. These measures differ and are reported separately, even though they all reflect how much more expensive something has become, not whether it has become cheaper. In July, the headline inflation rate dropped to 4.3 percent from 5.0 percent, while food inflation remained low at under 1 percent, the lowest in 16 years.

Statistics South Africa also tracks a running measure of the price level, which shows how the cost of an average basket of goods has changed over time. From 2015 to now, the basket has become roughly 70 percent more expensive, with almost every month contributing to that rise. During the same period, oil prices fell from US$99 a barrel to US$44, then rose again to above US$100 and dropped back to US$69.

The South African rand also experienced significant fluctuations, moving from under R11 to the dollar to over R18, and back again.

Although oil prices are currently above US$100, the rand is at its strongest level since 2022, trading around R16 to the dollar and even dipping below that recently. This combination of factors means that gasoline is 7.1 percent cheaper in July compared to the previous month, while diesel is 11.7 percent cheaper. However, despite these small decreases, a basket of basic household items, such as bread and maize meal, remains R100 more expensive than last year.

Credit is due to the government for cutting the general fuel levy by R3 per litre in April and maintaining the relief through June. This action saved about R17 billion in foregone revenue over three months. The Competition Commission warns that prices may not decline once fuel prices stabilize, describing the situation as "rocket-and-feather behavior."

While food inflation is at a sixteen-year low, and maize meal and bread even became cheaper in July, this improvement is attributed to two good rainy seasons, which resulted in a higher-than-usual maize harvest. However, an upcoming El Niño weather pattern could disrupt the maize crop, potentially leading to higher prices for basic food items.

The key to monitoring the situation is to keep track of the same basket of goods over time and observe whether price decreases occur in response to stabilizing fuel prices.