Picture source: Surf4Cars
Falling prices: Is this good or bad for the consumer?
In April of this year, the world went in shock when there was a drastic decline in the price for crude oil, which saw the price of a barrel trading at -$37.63. This price being a direct result of the COVID-19 pandemic which battered the oil markets in a way that analysts could not see coming. This decline in demand for crude oil has had a bittersweet effect on consumers with the obvious decline in the overall fuel price. But how much comfort is it for consumers who have been battling to keep their financial priorities in check since the start of the pandemic, with many having lost the ability to earn an income as companies alike also battle in keeping their heads above the water?
It is without a doubt that over the last couple of months, the country has seen a considerable decline in the price of fuel but how has this decline affected the overall inflation rate of the country?
Stats SA delivered news (on 15 July 2020) about the country’s current consumer price inflation, with the falling fuel prices being the main contributor to the slump of inflation. We firstly need to understand what is meant by inflation and how this relates to the overall running of South African economy. Simply put, inflation is defined as the continuous rise in the general prices in an economy. The inflation rate can be measured by a number of price indices, with most countries (including South Africa) measuring inflation with the use of the consumer price index (CPI) which calculates the changes in the prices of consumer goods and services. In South Africa, this figure is calculated and published by Statistics South Africa on a monthly basis.
In May 2019, the price of inland 95-octane was R16,67 whereas in May 2020, the price was R12,22 which is a significant reduction of 26,69%. Though motorists are paying less for petrol, meat and dairy prices have however increased, but with beverages being cheaper.
The latest consumer price index, which was published on Wednesday, notes that the price of meat has increased by 5.5%, (though the price of stewing beef is 2,1% cheaper than what it was in April) while the price of dairy products climbed by 7.1% with other goods such as peanut butter, oils and fats having continued to accelerate (Stats SA, 2020).
Picture Source: Businesstech
It’s important to note that the Monetary Policy Committee (MPC) has set out inflation targeting to achieve an average inflation rate of between 3% and 6%. This target is based on the belief that long-term economic growth is achieved through price stability, which can only be achieved through controlling inflation. As it currently stands (as of 15 July 2020), South Africa’s inflation rate is sitting at 2.1% which is below the set target by the MPC. This then poses the question on whether the country is in spate of either going through deflation or disinflation.
Deflation vs Disinflation
Deflation, which is the opposite of inflation is simply defined as the decline in prices over time. A decline in prices over time is not seen as a problem however, it does become a serious policy problem when the expectation of lower prices in the future results in consumers postponing consumption.
Whereas disinflation is a process of a declining rate of inflation over time. In this instance, the inflation rate is declining over time, but it remains positive. Disinflation occurs when price inflation slows down temporarily.
In the case of our economy, and with the hard regulations set out during level 5 of the lockdown in March, with increased job losses and industries which shut down in efforts to curb the infection rate, this has resulted in the deflation of goods and services within the economy. As pricing continuously fall, firms and industries alike find it almost impossible to survive. This has resulted in workers being laid off, or in some instances where wages and salaries have been cut.
As the pandemic continues to sweep its wave unto the world, this poses greater strain on world economies as policy makers continually try to implement and adjust their policies set out to recover and restart their respective economies. These are unprecedented times with circumstances outside the control of the MPC but all hope is not lost yet, or is it?
The views expressed in this article are of the author. All views expressed in this article are my own and do not represent the opinions of any entity whatsoever which I have been, or now, or will be affiliated with.