Prof Itumeleng Mongale, Acting Head of the Department of Economics, highlights that, as of late, the global economic environment has been affected by several significant changes, like the Covid-19 pandemic, the greater-than-expected persistence of inflationary pressures, and the Russia-Ukraine war, which brought about the single most considerable change. He observes that the war is expected to have a negative impact on the global economy while driving up inflation.
“The war has immense ramifications for the global economy since these countries are responsible for about 29% of the wheat exports and 75% of the world’s sunflower oil exports,” he states. He adds that Ukraine is the fourth-largest exporter of corn and wheat and the world’s largest exporter of sunflower oil. “On the other hand, Russia is the world’s major exporter of grains, natural gas, and fertilisers and is among the world’s largest suppliers of crude oil,” Prof Mongale explains.
A recent report by Coface Trade shows that the war has resulted in higher commodity prices, which has intensified the threat of long-lasting high inflation. Akin to other countries, Prof Mongale asserts that SA is not spared by the imported inflation triggered by the war. He points out that the economy experienced unprecedented increases in the price of fuel and food items, such as wheat and cooking oil.
Prof Mongale says that rising inflation affects the economy in several ways, such as reducing the purchasing power or ability of the Rand (currency), which means consumers will have to spend more money than they did before to purchase the same items. On the other hand, it brings about increased spending that positively affects the economy because more money enters the money supply, which can drive inflation even higher.
Prof Mongale’s sentiments are supported by the Federal Reserve Bank of St. Louis, which states that the consequence of inflation is that it imposes “shoe-leather” costs on society. This, according to Prof Mongale, means that citizens spend their time and resources managing their money and other financial assets. In other words, consumers spend more on inflation-hedging activities rather than using those resources to produce goods and services for the economy.
Prof Mongale, the manuscript reviewer for eight internationally renowned journals, concludes that since keeping the shoe-leather costs down is one underlying rationale, the South African Reserve Bank’s commitment to price stability will have to increase interest rates to curb inflation.
“The higher interest rate (higher cost of borrowing) causes borrowers to re-evaluate taking out loans to make major purchases,” he elaborates, stating that as a result, the money that would have been used as collateral remains in the consumers’ and business accounts earning interest. He adds: “Therefore, less is being spent, and there is less money in the money supply, slowing down the inflation rate.”
Aaron Kennon, Chief Executive Officer at Clear Harbor Asset Management, supports this notion and mentions that even though there are no foolproof methods, consumers can look at scaling back on long-term bonds, owning stocks with pricing power, and investing in commodities.