Viewpoint: Scary potential for further fuel price jump in May

Much of the focus on the implications of the Iran war has been on the increase in fuel prices last Wednesday, which could potentially push inflation up to 4.0%. Little has been mentioned about the fact that maintaining oil prices at elevated levels since the end of March implies a further substantial increase in fuel prices in early May. The figures are scary. Based on the average under-recovery through to yesterday in the month-to-date, petrol prices could rise by a further R4.70 per litre and diesel by a whopping R10.07 per litre in early May. This is even after incorporating the generous R3-per-litre fuel levy allocation to mitigate the April price increase and temper the damage to consumer spending, agriculture, and business.

This concession will now have to be extended at least through May, and even then, inflation is expected to rise to at least 4.5% in May. More concerning is the potential for inflation to shoot up further due to second-round price effects, especially in respect of food, as the war drags on. It means the Reserve Bank will have little option but to raise the repo rate at its May MPC meeting and might even have to do so by a full 0.5%. Much depends on whether the deadline offered to Iran tonight is met, in the absence of which there is likely to be a huge further escalation of hostilities that could see increased damage to oil and gas production facilities in the whole Gulf region.