/ 16 May 2011

How the oil price, inflation and interest rate affect your pocket

While unrest in the Middle East and the exchange rate may seem unrelated to your everyday life, their impact is widespread and affects everything from the price you pay to fill up your car to how much it costs to feed your family.

Yet understanding how economic indicators like the Consumer Price Index (CPI) or interest rate influence your daily expenses can help you manage your finances that much better by staying out of debt and paying off your credit, like a home loan, faster.

The sustained political problems in Libya — one of the world’s oil producers — caused the price of Brent crude to rise significantly in the early part of the year due to global supply concerns. Because oil plays a key role in the price of fuel, we saw petrol’s cost skyrocket to over R10/litre — directly impacting motorists’ pockets.

Yet, while oil dropped to $112,86 a barrel last week, it doesn’t necessarily signal immediate good news for consumers. This is because other factors like the exchange rate, international refining margins and taxes also influence the price of fuel in South Africa.

The fuel price has a direct knock-on effect to the cost you pay for food and other consumables meaning that a week’s worth of groceries today costs more than it did a few months ago. This is because fuel is an integral cost in agricultural production and logistics. So, as soon as fuel costs more, so too does everyday produce like vegetables, meat and grains as not only is it more expensive to produce, it is also more expensive to deliver to retailers to meet consumer demand.

Conversely, when the fuel price decreases, it costs less to produce and deliver food to consumers. This means that if the cost of food increases at a slower rate, inflation rates will be kept in check — something a decreasing oil price can also help achieve.

And, while the Reserve Bank’s announcement last Thursday to leave interest rates unchanged at 5.5% is good news for the time being — because you won’t pay more for interest on your credit cards or home loan — if inflation becomes a problem in future, the Reserve Bank may consider increasing the interest rate to try and manage it.

Gill Marcus, the Reserve Bank governor, last week said that CPI inflation would reach the upper limit of its 3% to 6% target range in the fourth quarter of 2011 and rise to 6,3% in the first quarter of 2012.

Because of this, an increase in interest rates is likely and she recommends that you get your debt under control as soon as possible — before it gets more expensive.

While the Reserve Bank didn’t change the interest rate now, they are indicating that they will take a different approach later in the year. This, coupled with rising food and fuel prices, means you will have higher everyday costs to absorb than you do today which may impact your ability to pay your children’s school fees, settle your debt timeously or save adequately towards retirement, among other things.

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