Russia’s invasion of Ukraine and tightening sanctions on Russia have sent commodity prices soaring, and will have adverse implications for South Africa’s headline consumer price inflation (CPI), says senior economist at Absa CIB Peter Worthington.
Each 10% rise in the price of crude oil equates to an additional 0.2 percentage points directly on the CPI, said Worthington.
“With fuel accounting for 4.82% of the CPI, a 10% increase in the price of crude – all other things being equal – translates to a 4.6% increase in the pump fuel price, which in turn translates to an additional 0.2pp directly on the headline CPI. One of the most obvious of these is public transport prices, which account for 2.4% of the CPI basket, but a much higher share of the consumption basket of low-income households.Surprisingly, the correlation between fuel prices and public transport prices is not very close, perhaps because of threshold effects and some downward stickiness in public transit prices, said Worthington.
“Despite the weakness of demand, if fuel prices surge, food producers may have no alternative but to pass on at least some of the cost increases to consumers.” “For instance, one might expect the relationship between ‘bread and cereals’ – which is predominantly wheat-based products – and wheat futures prices to be pretty close, but in fact, the correlation seems to vary over time.
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