Rolling load shedding could lead to price hikes

South Africans are being forced to adjust to a new normal, only that this time it is sending chills down some patriots’ spines – especially thinking about how the economic – and later political crisis unraveled in neighboring Zimbabwe. Load shedding in that country was nicely explained in its initial stages, too, until a time when things got so out of hand that there was no longer the need to communicate when power was going to be cut and when it would be switched back on. When it got to that stage, everything else followed, and the rest is history.

Eskom, the country’s power utility, announced at the beginning of the week that it was now taking the country into stage 4 load shedding. Here, South Africans spend up to 6 hours without power each day. This is the second time this has happened in a short space of time. Continuous power shortages are not doing any favors to the business community. They are incurring extra costs to fuel and repair generators more than what they can bear.

Already, inflation is getting closer to the upper inflation target band. One would like to see prices going down, especially with the ongoing pandemic. But rolling load shedding casts a considerable shadow of doubt on any aspirations around price stability.

Already, producer prices have been on the rise in South Africa. In September, they climbed to 107.2 points from 106.2 points in August. The steadily increasing number means that the cost of producing is steadily rising. In turn, producers increase the prices of their products to cover costs. When retailers get these products, they also put a mark-up that the final consumer bears.

Therefore, rolling blackouts are increasing costs for both the producers and retailers. An environment where businesses are suppressed is never ideal for the final consumer. This festive season could see even more price increases, meaning that South Africa could begin the new year under an inflationary environment.

The SARB’s dilemma

The South African Reserve Bank (SARB) has held repo rates flat, at a record low of 3.5%. But rising inflation, last reported at 5% in September, is a cause for concern. Because of this inflation rate (close to the upper end of the 3%-6% inflation target band), economists think it’s time to raise interest rates.

However, this might not be a decision that the SARB can come to without thinking about the ripple effects. Of concern is the fact that the economy at large has been suppressed and needs growth. Raising interest rates retards progress on this end.

Therefore, even if it may be time to raise the interest rates, the SARB may be compelled to follow the likes of the USA that have held repo rates lower. This deliberate move keeps more money in circulation – a move that many analysts think is to create artificial Gross Domestic Product (GDP) growth and counter heavy borrowing that governments incurred during the pandemic. After all, a high debt to GDP ratio is unwanted. What better way to keep it low than create a higher GDP?