South Africa economic outlook, July 2023

Due to different spending patterns, poor households tend to experience inflation much worse than rich households. According to Statistics South Africa, the country’s national statistics agency, poor households that spend less than R20 140 per year (ca US$1,070) allocate on average 50% of their budgets toward food and nonalcoholic beverages. In contrast, the richest households spending more than R312 247 per year (ca US$16,610) allocate on average 11% toward food and nonalcoholic beverages (figure 2).

As a result of the disproportionally high allocation toward food and stubbornly high food prices, poor households are the hardest hit by inflation and have in fact been experiencing high inflation for a prolonged period. Spending half of their budgets on food and nonalcoholic beverages also leaves poor households with little room to reallocate budgets away from nonessential spending towards food. Over the last 12 months, the poorest decile of households (Decile 1) experienced a much higher inflation than the overall consumer price index (CPI), while the richest decile (Decile 10) enjoyed inflation below the CPI for 11 of those 12 months (figure 3).

Not only has high food inflation put tremendous pressure on poor households, it has also reduced their ability to afford nutritious and healthy food. According to the Pietermaritzburg Economic Justice and Dignity Group (PMBEJD), a civil society organization that tracks food prices and compiles the household affordability index, the cost of the basic nutritional food basket has increased by 12.2% year over year in May 2023, and hence is slightly higher than overall food price inflation of 12% for the same month.

The PMBEJD also highlights that in May 2023, the child-support grant of R500 (ca US$26) per month was 45% below the average monthly cost of a basic nutritious diet for a child, illustrating the difficulty poor households face while balancing between putting food on the table that satiates hunger versus food that is nutritious. This trade-off is worrisome, as lack of nutrition could lead to stunting and have adverse implications on children’s cognitive development.⁸

Addressing food insecurity remains an urgent task in South Africa. Without meaningful and effective interventions, stubbornly high food prices combined with high unemployment and poverty present an alarming mix that is likely to have long-term socioeconomic implications, potentially trapping children born into low-income households into a vicious cycle of poverty.

While inflation has started to ease and is expected to return to levels that fall within the South African Reserve Bank’s target range of 3% to 6% in 2024,⁹ the poor in South Africa are likely to pay the highest price for high food inflation in years to come.

According to the Deloitte’s State of Consumer Tracker, compared to consumers in other markets, high food prices have led to greater frugality among South African consumers. This consumer shift toward essential items may pose challenges for nonfood retailers who will have to compete more aggressively for the squeezed share of nonessential spending in South Africa.

Despite the easing of inflation in recent months, the South African Reserve Bank Governor Lesetja Kganyago has indicated that it was too early to loosen the country’s monetary policy.¹⁰ While the tighter-for-longer policy is likely to support the further easing of inflation, it could potentially delay any significant uptick in growth. In the light of this, the Reserve Bank has to walk a tightrope of finding the right balance between stabilizing prices, which would reduce pressure for low-income households, and helping with stimulating economic growth through lower interest rates in an economic environment subject to a range of challenges, most notably deep structural constraints to growth.