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Fuel and electricity price hikes and how they will affect the country

Picture: Karen Sandison/African News Agency(ANA)

Picture: Karen Sandison/African News Agency(ANA)

Published Mar 1, 2022

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By Koketso Mano

The electricity price hike for this year has been announced at 9,6 percent; this comes as some relief because Eskom had applied for a 20,5 percent increase.

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We expected that electricity price inflation would be in the double digits once again this year. Inflation for electricity in 2021 was nearly 18 percent for direct consumers and 14 percent at the municipal level.

So, this year’s lower price hike came with relief and adds to other admin price relief efforts announced at the 2022 Budget. The finance minister did announce that there would be no fuel and road accident fund levy increases.

This is broadly in line with the theme of providing some relief to consumers and businesses during the ongoing recovery of the economy. However, there are some key considerations.

Electricity inflation is still running above headline. 2021’s headline inflation average was around 4,5 percent. Presumably, those that are still getting wages or grants will have these adjusted in line with headline figures.

This means that electricity prices can constrain budgets, forcing less spending on other goods and services or erode their purchasing power.

This is the case with fuel prices as well. After steep increases towards the end of 2021, we will have a near R1.50 per litre increase this month, given the surge in oil prices.

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These electricity and petrol price pressures filter through to the production and distribution of goods. This also includes the delivery of services, transport, and living costs in general for households.

Something that we consider very important when we think of lower-income households who tend to spend most of their income on essentials such as food and public transport is their inflation, which is currently running above 6 percent and is close to 7 percent.

This will be something that further constraints household spending going forward. Given how risk around fuel price hikes evolve, this could constrain spending and dampen the recovery.

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If interest rates rise faster than we currently expect in an effort by the Central Bank to contain expectations of inflation which could make current rates of inflation that we are experiencing more permanent or sticky.

Koketso Mano is an Economist at FNB.

*The views expressed here are not necessarily those of IOL or of title sites.

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