My Money / 29 January 2019, 08:19am / Etienne le Roux
We cannot underestimate the systemic impact of a rise or drop in the price of transport (measured in the drop in fuel prices).
This key metric impacts everything from people’s mobility and ability to get to work to the cost of manufacturing as all raw materials as well as end products need to be moved in and out of production points.
More mobility and lower costs increases employment and purchasing power with a cyclical beneficial impact on economic growth. At least, that is the theory.
Volatility in fuel costs is a deterrent to the systemic benefits that are possible if only the cost of fuel and transport could be stable and sustainably lower.
Unfortunately, fuel prices are prone to go up just as fast as they go down. When this happens, the impacted sectors of the economy do not fully adjust as this would also be difficult and disruptive.
Why lower prices of transport for one month, only to have to increase them the next month? This is confusing for consumers and difficult for suppliers to manage and communicate.
So, unfortunately, what we tend to see happening is that when fuel prices go up, impacted sectors of the economy adjust prices upwards quite quickly in order to remain financially viable, but the adjustment downward is not as rapid as suppliers are hesitant to drop prices only to have to increase them again shortly after – this creates communication and expectation friction between them and their clients.
The positive news is thus that, if the fuel price can be kept sustainably lower, there is probably more opportunity for other prices systemically impacted by cost of transport to decrease thus further lowering the consumer price index (CPI) and increasing consumer affordability.
This becomes a virtuous cycle of economic expansion. However, the aspects of the economy (local and global) that support sustainably lower fuel prices, in our view, still contain instability risk. Currency risks, oil production politics, economic exclusion, etc, etc. etc are all matters that create direct or knock-on instability in fuel prices.
The current windfall of lower CPI is, however, very important and beneficial to every day South Africans and provides much sought after relief in affordability for basic needs. Our hope is always that this will enable greater savings and thus better future options for people – but, again, stability of lower CPI is a critical trigger to savings behaviour.
Typically people need at least a few months of extra space in their budgets before they commit to ongoing savings behaviour. Even then, it is very easy for new expenses to rapidly absorb the CPI windfall. This is where we have a role to play to assist clients to plan for and save for future life goals.
There is also some causative and correlative effects between CPI, interest rates and investment returns that we need to keep in mind. If interest rates do come down off the back of lower CPI, then there is usually some adjustment to investment returns on savings but this depends heavily on the construction of the portfolios people invest in.
The simplest illustration of this is in fixed interest investments – if CPI comes down, and interest rates follow, then interest rates on savings deposits also come down. It is thus important for us to ensure we use our advice and investment expertise to assist clients to plan for and manage these impacts as well.
A final comment is that the composition of CPI is actually different across various income segments in South Africa. It is important to look at a segment weighted basket of goods to determine the real CPI for various market sub-segments as there is noticeable differences observable at these more granular analyses levels.
Etienne le Roux is Metropolitan’s chief financial officer. The views expressed here are hers.