COST OF LIVING

Consumer budgets are going to be stretched by rising prices, say analysts

Consumer budgets are going to be stretched by rising prices, say analysts

In the week the last Covid regulations were lifted, enabling theatres, restaurants and cinemas to pack in patrons, inflation figures for May indicate that consumers will have less money to spend on leisure.

Stats SA reported this week that the May consumer price index (CPI) hit 6.5% — from 5.9% in April and 5.2% in May last year. The May data means inflation has breached the Reserve Bank’s inflation target range of between 3% and 6%, signalling that interest rate hikes could be higher than expected. Economists forecast a hike of up to 75 basis points when the monetary policy committee (MPC) meets on July 21. The current repo rate is 4.75%.

For consumers with home loans and other debt, monthly repayments will go up.

Should rates be hiked by 75 basis points next month, a consumer with a R1.2m home loan over 20 years will see monthly repayments increase from about R10,200 to about R10,780. To finance a loan on an entry-level Suzuki S-Presso worth R156,900, consumers paying about R2,940 a month now can expect that figure to rise by about R60.

Lebogang Gaoaketse, head of marketing and communication at WesBank, said rising inflation will place stress on household income as the cost of living increases. “The direct impact of this will be affordability when it comes to vehicle purchases and a strain on consumers who already have vehicle finance agreements.”

Gaoaketse said inflation, particularly in the used-vehicle market, was already a barrier to entry for buyers due to the scarcity of good stock. The shortage of new vehicles due to the effects of the pandemic, in addition to the unavailability of certain parts from Eastern Europe because of the war in Ukraine, was compounding the situation.

“We anticipate that vehicle prices across the board, including entry-level vehicles, both new and used, will increase in the coming months, and the average monthly

repayments for vehicles will increase too.”

Hayley Parry, money coach and facilitator at insurer 1Life, said the increase in inflation will have a knock-on effect on the interest rate, with a further increase predicted when the MPC meets.

Parry said consumers often had more than one loan. “They may have a car loan, a cash loan, some retail cards, and possibly a bond. All of the small increases on these multiple loans add up quickly; suddenly your monthly cash flow has taken a knock between the increasing debt repayments and the increased cost of living,” Parry said.

Parry cites an example in which a consumer paying off a Kia Picanto worth R120,000 at an interest rate of 10% in November last year would have been paying a premium of R2,294. She says interest rates have since risen by 1.25% percentage points and the repayment would now be R2,361 a month. If the interest rate is hiked by 75

basis points, the monthly premium would rise to R2,402.

Jaco van Jaarsveldt, CEO of Experian, a consumer credit reporting firm, said consumers were focused on living expenses rather than settling debt, resulting in an increase in credit defaults. “In a nutshell, with inflation rising sharply, consumers will focus on core necessities like food and periodically miss payments on credit facilities and loans as a result, favouring payment of credit cards above other debts.”

The May consumer inflation figures were mostly driven by rising prices for food and nonalcoholic beverages and the cost of housing, utilities and transport.

According to the Pietermaritzburg Economic Justice & Dignity Group’s household affordability index, year-on-year price comparisons for some common items include R201.90 for a 5l bottle of cooking oil in May 2022 vs R132.86 a year earlier, R381.66 for a 10kg bag of frozen chicken pieces vs R328.28, and R77.43 for a 10kg bag of potatoes vs R63.59.

Izak Odendaal, an investment strategist at Old Mutual Multi-Managers, said: “This clearly leaves less money to spend on other items, meaning discretionary spending comes under pressure things like restaurants, holidays, clothing and electronics. Unfortunately, we haven’t seen the peak in petrol prices since the rand oil price remains elevated. It is also unlikely that the fuel levy relief will be extended again.”

Economists said higher interest rates are a painful but necessary remedy for runaway inflation.

Dawie Roodt, Efficient Group chief economist, said SA is facing tough times because of high levels of unemployment, poverty, soaring food prices and the central bank increasing interest rates.

He said the MPC had to raise interest rates as its objective was to ensure inflation did not spiral and become entrenched at a higher level.

Persistently high inflation is especially bad news for pensioners as it cuts the value of their pensions and other savings.

Roodt said: “It is going to be painful, it is not going to be nice, but it is inevitable and necessary. The sooner they do that [raise rates], the fewer increases in interest rates will be required to stop this process of inflation.” He expects the central bank to raise the repo rate by 50 basis points next month.

Jeff Schultz, a senior economist at BNP Paribas SA, said the spike in inflation had made a hike of 75 basis points, rather than 50, more likely. He said inflation looked set to breach 7% from June.

Raymond Parsons, a professor at North West University Business School, said the challenge facing monetary policy and central banks generally was to raise interest rates enough to curb inflation, but not so much as to affect growth and employment.

“The right ‘mix’ depends on individual country circumstances. The debate about the impact of interest rates on the South African economy is therefore not whether economists are ‘hawks’ or ‘doves’, but whether they are optimists or pessimists. Most experts agree that the Bank has to act. The debate is about how painful the consequences will be, given South Africa’s other socioeconomic challenges.”

With inflation rising sharply, consumers will focus on core necessities like food and periodically miss payments on credit facilities and loans Jaco van Jaarsveldt

CEO of Experian