Inflation pressures mount as oil price hits $130

Crude oil futures jumped to their highest levels since 2008 early on Monday, seeing the price hit $130 a barrel, amid concerns that the West will ban Russian oil imports after that country’s invasion of Ukraine. 

Record-high oil prices come as South African consumers are already grappling with the prohibitive cost of fuel, which has become the main driver of domestic inflation

Last week, the Automobile Association warned that petrol price increases in March will affect “every single South African given the reliance the country has on fuels for transportation, manufacturing and in the agricultural sector”. Last week, the inland price of 95 octane petrol rose above R21 a litre for the first time.

Higher oil prices will also drive up the cost of food. This comes as the war threatens global grain exports, to which Russia and Ukraine contribute significantly. 

On Sunday, agricultural economist Wandile Sihlobo wrote that over and above the threat to South Africa’s grain supply, the war also jeopardises fertiliser exports. Russia is the world’s leading exporter of fertiliser materials in value terms, Sihlobo noted. In South Africa, fertilisers account for about 35% of grain farmers’ input costs. 

The oil price trajectory has worsened significantly in recent weeks, because Russia has ramped up its aggression on Ukraine. The severe financial sanctions imposed on the Kremlin have so far excluded the energy sector. But the oil price has continued to spike as buyers shun Russian oil. Russia is the second-largest oil producer in the world.

In an interview on Sunday, US secretary of state Antony Blinken said the country and its allies in Europe are “in very active discussions” about banning the import of Russian oil. A ban on Russian oil is a risky move for advanced economies, which have dealt with record-high inflation — a result of Covid-related supply chokeholds — for months.

The annual inflation rate in the US accelerated to 7.5% in January 2022. This was the highest since February 1982 and was the result of soaring energy costs, labour shortages, and supply disruptions, all worsened by a strong recovery in demand. 

In the Eurozone, consumer inflation rose from 5.1% in January to 5.8% year-on-year in February, on the back of surging energy prices. This was the highest since the creation of the euro and well above the European Central Bank’s inflation target of 2%.

South Africa will not escape the inflationary effect of war-related stock market fluctuations, the Bureau of Economic Research (BER) warned on Monday morning. “In January, we forecast that headline CPI would average 5% in 2022. In an interim step, this has been revised up notably to 5.5%,” the BER noted in its weekly update.

“Given the further oil price surge in recent days, the updated forecast is already outdated, with further upward revisions required if oil stays at these levels. This is especially the case as a growing list of local companies are commenting that they can no longer absorb a sustained rise in input costs and will now start to pass these on to the end consumer.”

The BER said it is not changing its forecast that the South African Reserve Bank (Sarb) will increase the interest rate by another 75 basis points in 2022. The next 25 basis point hike is pencilled in for the end of March. 

“However, given rising risks of secondary price effects emerging and in order to anchor inflation expectations, the risk is that the Sarb sees the need for a more aggressive, front-loaded hike in March. Still, such a move will risk compounding the impending hit to real GDP growth.”

Annabel Bishop, the chief economist at Investec, said in a note last week that while the inflation outlook would have improved in the near term — on the respite in this year’s budget from usual fuel tax increases — “escalating international oil prices have largely scuppered this effect”.

The oil price is likely to climb further as long as the Russian-Ukraine conflict escalates, Bishop said. This will add to inflation concerns, along with wheat and edible oil prices, fuelling price pressures domestically “and keeping South Africa’s inflation elevated nearer to 6% than 4.5% year-on-year”. 

The Reserve Bank, Bishop said, “will likely be on the lookout for second-round inflationary pressures deriving from high commodity prices, particularly very elevated fuel prices, causing the Sarb to remain hawkish”.

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Sarah Smit
Sarah Smit
Sarah Smit is a general news reporter at the Mail & Guardian. She covers topics relating to labour, corruption and the law.

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