Consumers making peace with rising prices

The prices of goods and services in Namibia continue to increase, driving up the cost of living. Statistics released by the Namibia Statistics Agency (NSA) indicated that inflation in Namibia during April 2022 stood at 5.6%, the highest since November 2018, analysts said.

This is a 1.7 percentage points increase when compared to 3.9% recorded April 2021 and 1.1 percentage points more when compared to 4.5% registered in March this year. During the first four months of 2022, inflation in Namibia averaged 4.8%.

According to the NSA, the three main contributors to the annual inflation rate for April 2022 were mainly transport (2.7 percentage points, food and non-alcoholic beverages (1.1 percentage points); alcoholic beverages and tobacco (0.6 percentage points).

Inflation in the transport category which carries the third largest weight of 14.28 in Namibia Statistics consumer basket was mainly driven by fuel which recorded an inflation 27.3% compared to 19.2% recorded in March 2022. On average, about 14% of household budgets is spent on transport.

On a positive note, the Ministry of Mines and Energy provided some relief on fuel prices for the next three months, thanks to a reduction in levies and taxes.

For the food and non-alcoholic category which carries the second largest weight of 16.45, inflation was mainly driven by oil and fats sub category which recorded an inflation rate of 23.4% compared to 15.6% in Mach 2022. The alcoholic beverages and tobacco category’s inflation stood at 4.5% and has the fourth largest weight of 12.59.

With regard to the zones, consumers in Windhoek (Zone 2) paid relatively more for goods and services compared to consumers in other regions during April 2022. Inflation in Windhoek jumped by 6.3% compared to 3.7% recorded during the same period of 2021.

Moreover, Zone 1 (Kavango East, Kavango West, Kunene, Ohangwena, Omusati, Oshana, Oshikoto, Otjozondjupa, and Zambezi) inflation increased by 6.3% compared to 3.7% recorded during the same period of 2021.

Lastly, inflation in Zone 3 (//Kharas, Erongo, Hardap and Omaheke) increased by 5.3% in April 2022 from 4.4% recorded during the same period of the preceding year, NSA said.

Outlook

Commenting on the statistics, PSG Wealth Management notes that transport price inflation will likely remain near double digits throughout most of the year, despite the introduction of a temporary three-month reduction in levies imposed on fuel products in May.

“Even after this month's downward fuel price adjustments, domestic fuel prices are still N$2.3/litre higher since the start of the year. Additionally, the prices of wheat, maize, seed oils and fertilisers have also surged in the wake of the Russian invasion, which will continue to exert upward pressure on food price inflation,” PSG added.

Simonis Storm (SS) said “the latest data point indicates that we are starting to see rising input costs, commodity prices and elevated fuel prices filtering through to the local market.”

“We expect goods inflation to be the biggest driver of higher local inflation rates, as a result of ongoing global supply chain constraints keeping logistics fees high, elevated prices of commodities used to manufacture merchandise goods and elevated global oil prices.”

“Coupled with a current weaker Rand that is expected to weaken further into 2Q2022, we could see inflation consistently coming in higher than 5% in coming months. We maintain our forecast of 7.1% for 2022,” SS said.

In addition, NamPower applied for a 12.8% increase in electricity tariffs owing to rising input costs which have increased due to elevated commodity prices. Also, elevated global coal prices increase the cost of importing electricity from South Africa. However, the Electricity Control Board (ECB) only approved a 7.3% tariff increase effective 1 July 2022.

This implies that electricity prices can remain on an upward trajectory over the next two to three years as NamPower attempts to gain back on potential under-recoveries incurred in 2022. The housing and utility category has the highest weight (28.36) in the consumer basket, so the tariff increase has the potential to contribute to higher inflation rates, SS pointed out.

Comparison

Meanwhile, IJG Securities said the uptick in the rate in April means that the 1.4 percentage point differential between Namibia and South Africa’s inflation rates that have been in place since August last year is now significantly smaller. South Africa’s inflation rate came in just below the South African Reserve Bank (SARB’s) upper end of the target band at 5.9% in March. With inflationary pressure expected to remain high, the SARB’s MPC is expected to hike rates by 25 basis points (bps) at its May meeting, leaving the Bank of Namibia (BoN) with little choice but to follow in-kind in at its monetary policy committee (MPC) meeting June. IJG inflation model currently forecasts inflation to average between 5.0% and 6.2% in 2022.

The increase in inflation has a negative impact on investment returns. According to the Agricultural Bank of Namibia (Agribank), Rising inflation rates are eroding return on investments, particularly, government debt instruments. Therefore, to improve and preserve capital flow of fixed income instruments, BoN increased interest rates. Increasing interest rates has a bearing on Agribanks floating debt instruments, as it increases the debt servicing cost.

“The BoN hiked interest rates to cushion the impact on investment returns and restrain capital outflow. Despite rate hikes, we observe a decline in real return on the 5- and 10-year government bonds ascribed to rising inflation. Longer duration bonds are more attractive compared to the short-dated instruments, while inflation linked bonds are preferred in an inflationary environment.”

Furthermore, souring interest rates increase the cost of borrowing, exerting pressure on businesses. Similarly, Agribank real return on loans advanced has declined due to the crippling inflation rate. Further increases in inflation could result into negative real return on Agribank’s loan advances as well as shorter dated government bonds unless interest rates increase in the same direction.

Central bank governor Johannes !Gawaxab at the last monetary policy announcement said the increase in interest rates was a step towards normalising the current negative real interest rate environment and establishing a positive real interest rate that is conducive to long-term economic growth. Positive real interest rates will provide an incentive for consumers to save as there will be higher returns. [email protected]