/ 6 June 2022

South Africa’s middle class endures rising cost of living

How much is your chicken? (Photo by David Silverman/Getty Images)

In just one month, the price of a whole chicken from Woolworths has risen by more than 10%, from R49.99 to R54.99 a kilogramme. 

This inflated price tag is just one example of how the pay cheques of otherwise well-off consumers no longer go as far as they used to — and all signs indicate that the higher cost of living will gnaw at middle class incomes for at least the next 12 months.

In another blow to consumers, the petrol price went up by R2.43 this week. The steep increase comes despite the government having extended the reduction of the fuel levy, providing some relief to consumers who have become increasingly vulnerable to financial shocks.

The Mail & Guardian spoke to analysts about what is in store for South African consumers as high fuel and food prices continue to squeeze their incomes. Their resounding message: batten down the hatches, because it is going to be a punishing year on your finances.

Mounting costs

This week the Pietermaritzburg Economic Justice & Dignity group (PMBEJD) released its May household affordability index. The index, which tracks the price of the basic shopping basket for low-income households, noted that the average cost of this has increased by 11.4% compared with a year ago. 

In a statement, the group noted that prices are expected to continue rising for the rest of 2022. This comes as producer price inflation — which measures the change in prices being absorbed by manufacturers — has risen to a record high, reaching 13% in April.

On Tuesday, spokesperson Mervyn Abrahams said the group expects prices to remain high for at least the next 12 months, as commodity and food supply constraints continue to take their toll.

Oil prices rallied on Tuesday after European Union leaders agreed in principle to cut 90% of Russian oil imports by the end of this year. By Wednesday morning, crude futures had steadied to $115 a barrel, marking the steepest ascent in over a decade.

Elevated fuel prices pose a risk to consumer food price inflation, because a substantial share of agricultural products are transported by road. The South African Reserve Bank has revised local food price inflation to 6.6% in 2022, up from the previous forecast of 6.1%. 

Grain and oilseed supply shortages, also related to Russia’s war on Ukraine, will probably also exert upward pressure on local food prices.

South Africa’s unemployment crisis has also added to the burden on households, Abrahams said. Considering the country’s high levels of joblessness, the index factors in that the meagre minimum wage earned by one person will have to be stretched to support a four-person household.

Earlier this week, data from Statistics South Africa showed that the country’s unemployment rate was 34.5% in the first quarter of 2022, marking a retreat from the record high of 35.3% recorded in the previous quarter. Despite this softening, South Africa’s jobless rate remains one of the highest in the world, with forecasters anticipating that unemployment will remain elevated for years to come.

‘It hits everyone eventually’

The PMBEJD’s index has warned for years of the cost of living crisis endured by South Africa’s poorest households. Abrahams noted that it was inevitable that this crisis would eventually hit the country’s upper classes. “They are all going to be dropping down a notch or two, largely because the middle class has kind of a financial burden that the poor don’t have,” he said.

“So we have seen increases in transport, in food, in fuel, but we have also seen a lot of increases in medical aid costs, in education costs. With interest rates going up, debt servicing is becoming so much more expensive. So those who are carrying a lot of debt … are now caught in a situation where they are going to have to downgrade.”

Benay Sager, chief operations officer at DebtBusters, agreed, noting that although inflation tends to hit lower earners first, “it hits everyone eventually”. Higher-income earners, Sager said, bear the brunt of higher interest rates, implemented in an effort to pull back inflation.

The Reserve Bank recently raised the repo rate, which affects the cost of borrowing, by the highest increment since 2016. The 50 basis point hike was met with ire from critics, including trade union federation Cosatu, which said the central bank’s decision would only serve to further constrain consumer demand.

“Interest rates hit higher-income earners first … And the people in between, the middle class — who in South Africa we would classify as taking home anywhere between R5 000 and R15 000, which is the majority of the population — are getting hit on both fronts,” Sagar said.

Vulnerable to shocks

Sagar painted a picture of just how stretched South Africa’s salaried consumers have become over the past six years.

Between 2008 and 2015, Sagar noted, there was a big push for public sector employment. According to Statistics South Africa’s quarterly employment survey, jobs in the government sector increased by 16% between 2009 and 2015. Between 2015 and 2021, this number only rose 6%.

“A major source of employment has kind of dried up. In addition to that, employment in the private sector hasn’t gone up significantly. So what you are seeing is that consumers, who would historically get somewhere between 6% and 10% pay rises every year, that has either become nought, or very close to inflation at 3% or 4%,” Sagar explained.

“So because incomes haven’t kept pace with inflation, they have had to spend a greater share of their income on necessities. And as a result, they have become more vulnerable to any sort of shock. It could be something like Covid, which is a great example of a big shock. But it could also be the petrol price increases or inflation.”

The pandemic dealt a huge knock to incomes. According to the Reserve Bank’s most recent monetary policy review, although private sector incomes have recovered significantly since 2020, they are still below pre-pandemic levels.

In its first-quarter debt index, DebtBusters noted that consumers have 31% less disposable income because salaries have not grown with inflation. Consumers are also having to spend about 62% of their take-home pay to service their debt. 

Alarmingly, the debt-to-income ratios, which compare how much consumers owe each month to how much they earn, for the top two income bands hit record levels in the first quarter of 2022: 125% for those taking home more than R10 000 a month and 150% for those taking home R20 000 or more a month. 

Similar data was recently released by FNB, which estimated that it takes an average of five days for a middle-income consumer, earning between R180 000 and R500 000 a year, to spend up to 80% of their monthly salary. 

‘Something has to pop’

The higher cost of living will inevitably hit demand — a fact that, in a country that also experiences high levels of unemployment, spells disaster for the economy. 

Sagar said South Africa has a sophisticated economy, which is integrated into the global market and has a robust formal sector. “So in some ways that is good. It shields us.

“At the same time, it does also have a very large informal sector. And it relies heavily on consumption, consumption that is based on credit. So it is like a tube that you are squeezing on both ends. Something has to pop. And I think that is kind of what is happening.”

Because consumers have a finite amount of income, they are having to adjust their priorities to make ends meet. Sometimes this means taking on more debt. “But also consumers have cut back on a lot of things,” Sagar said.

“Sometimes you get people on radio or on TV giving practical advice to consumers telling them to cut back on luxuries. And my question to them is, ‘When was the last time you walked around and talked to people?’ Nobody is spending any money on luxuries. They are actually spending on bare necessities … And I think that’s where we need to focus. It is a bit of an inconvenient truth. But that is really where we are.”

Abrahams said the poorest have had to adjust in the wake of higher food prices. The data used to compile the PMBEJD’s index is collected by women living on low incomes in Johannesburg, Durban, Springbok and Pietermaritzburg. Abrahams said these data collectors also conduct qualitative research, speaking to other women they come across in grocery store queues and in taxis.

Scarce items

“Women are saying that they are cutting back on meals. They are not having as many as before. It is almost unheard of to have three meals a day. They are also going for the cheapest food they can get … There are almost no brands. It is either the store brand or the cheapest food in that category. So they are going for cheap and they are going for less.”

Jacolize Meiring, head of the Personal Finance Research Unit at the University of South Africa (Unisa), said South African consumers are facing immense pressures. “It is load-shedding. It is the fuel price going up. Eskom tariffs are going up. Inflation is increasing because of food prices,” Meiring said. “So there is this constant pressure. That makes it difficult for a consumer to remain positive and optimistic.”

Meiring’s team at Unisa works with Momentum to compile the consumer financial vulnerability index, which surveys retailers, insurers, banks and others on the perceptions they have of their clients’ financial situations.

According to the index covering the first quarter, consumers expect financial strain to intensify in the coming months. The majority expect that inflation will increase rapidly and that unemployment will rise. Some 89.9% of key informants say it will take more than a year for consumer finances to recover.

Across the board, consumers are having to treat electricity, petrol and food as scarce items, Meiring said. “Those small changes make that gap just a little bit bigger for you to be able to sustain another big shock.”

Considering the sustained pressure of food and oil prices, Meiring said it is unlikely the chokehold on consumers will let up anytime soon. Key informants of the consumer financial vulnerability index are expecting that it will still be 18 to 24 months before finances recover.

“The truth of the matter is, we are in difficult times. We are entering the winter months, so load-shedding is most likely going to be with us for quite some time. We are going to see the spillover effects of increased fuel prices,” Meiring said.

“Long story short is, it will not be soon that things will change. So try to choose little things to make yourself more resilient. If possible, have an emergency fund. Every cent that you can, put that into an emergency fund. Because life happens.”