Consumers reel as price hikes hit home

Eugenie du Preez
2016-05-27 16:11
Post a comment 0

Cape Town - Ninety-four percent of South African households are potential dis-savers, according to data from the Bureau of Market Research (BMR).

This, explained Standard Bank economist Zaakirah Ismail, means that the income net of taxes, minus average expenditure, is highly negative for the low income groups (households with a combined income below R86 000 per annum) and marginally negative for the middle income groups (those earning between R86 000 and R688 000 per annum).

Ismail analysed this further by saying that households with a negative net income lack the means to cover their costs. So, to overcome this, they will either take out credit or take advantage of financial support from wealthy family members in the form of gifts or donations.

"Petrol and food are classified as non-durable goods. We find that when prices of these goods go up, consumers will still consume them as there are few substitutes," said Ismail. BMR data suggests that as much as 59% of expenditure by low income households is on non-durable goods, while the corresponding figure for middle income households is between 22% and 40%.

"This makes these households more susceptible to food inflation and... increases in the price of petrol/diesel and currency weakness," added Ismail.

And with a new petrol price spike on the horizon, consumers will be forced to absorb another additional expense into their consumption baskets.

Debt expert Neil Roets of Debt Rescue warned that this will have a severe impact on deeply indebted consumers, who are already battling to put food on the table.

“There is no doubt that we are entering uncharted territory in terms of the full impact that the fuel price increases are going to have,” said Roets. These projected hikes are already going to hit motorists hard and the bad news is that - depending on how the rand performs and whether the price of crude oil goes up further - even higher prices could very well be on the way.

This comes as the Automobile Association (AA) cautioned motorists on Friday to brace themselves for a huge fuel price hike in June, with further increases on the way in the coming months.

Speaking ahead of the official announcement of fuel price adjustments that will kick in on June 1, the AA said the pump price for a litre of petrol is set to increase by 52 cents, while illuminating paraffin and diesel are set to go up by 61c/litre and 78c/litre respectively.

READ: AA warns motorists of big petrol price spike

However, as many poorer households predominantly use public transport, petrol does not make up a large percentage of their total consumption baskets, said Ismail, adding "they would only absorb the price increases of petrol/diesel if public transport prices increase".

By contrast, the middle income groups with a greater reliance on their own vehicles for transport would be immediately burdened by petrol/diesel price hikes.

Economist Dawie Roodt said fuel price hikes have been expected because of the erratic performance of the rand and the rise in the price of crude.

“I think the halcyon days of cheap crude are over and South African consumers would be well advised to tighten their belts even further to prepare for the price increases that will follow the present fuel price increase and further escalations down the road.”

Turning to food, Ismail pointed out that food inflation is expected to peak at about 14% in 2016. Not surprisingly, low income groups - who according to BMR data allocate 29% to 33.5% of their budget on food - will be the most susceptible to this. The effect on middle income groups, who spend 7% to 18% of their expenditure on food, will be less severe.

Because the food shortages caused by the severe drought earlier this year have worked their way through the economy, all food prices have risen substantially, said Roets.

“We can expect further increases as the country is importing large amounts of food such as maize and wheat, because our producing areas were particularly hard hit by the prolonged drought.”

The fact that most consumers spend more than 75% of their monthly salary on servicing debt shows just how dire the situation actually is, added Roets.

Roets said government could help to alleviate the situation by lowering the fuel price levy that was imposed following Finance Minister Pravin Gordhan’s Budget Speech.

“Motorists should not be seen as the government’s cash cow and a concession now would go a long way to bring some relief to consumers whose budgets have reached breaking point," said Roets.

Tips to absorb extra spend on petrol

Ismail advised that consumers spend money only on essential transport such as travel to work and school, and cut back on the non-essentials such as trips to shopping centres.

She warned that borrowing money to fund expenditure such as transport is not sustainable, and suggested downgrading to cheaper goods and services. "Saving money will take more and better planning," she cautioned.

Debt management expert Wikus Olivier of DebtSafe said an additional R100 a month on a 60 litre fuel tank may sounds like a little, but it equates to R1 200 a year. This can be even more if you use more than one tank a month.

He advised that to absorb this additional expense, you must either increase your income or reduce your expenses. Some practical steps to quickly open some cash flow would be to review your insurance policies. Your car, for example, is worth less than last year this time, so your insurance premium should also be less.

"Have your broker review the premium, and it could quickly open an extra R100."

Another is to move your credit card debt into your overdraft facility on your normal cheque account. Interest and fees are less, and it could quickly open R100 per month.

You could also review the credit cover on your loans. "You might not even know this, but you are most likely paying 20% of your monthly instalment towards a credit cover policy. Get cheaper cover, and you can instantly open up some cash flow."

Both Roets and Olivier concur that the most important thing is to be aware of your expenditure. If you know exactly what you spend, you'll be able to cut out unnecessary spending, which will help you absorb the latest fuel price hike.

*Add your voice  by sharing your debt  experiences, debt-busting tips and insights. Have a question? Ask our experts.