Everything went according to plan (sort of), and the US and Iran have signed the 60-day peace agreement. The Strait of Hormuz will reopen soon. Oil prices will then fall, and then fuel prices and we will be almost be back to the good old days of February. But is it really that simple?
Whether the ceasefire will hold, we’ll leave to the political scientists — but economists can speculate about the oil price. Although the oil price has fallen considerably over the past week, it has not done so because the supply of oil has increased yet; it is in anticipation of that. It will take time to reopen the Strait to shipping and to reroute vessels currently taking alternative routes. Oil already loaded on tankers at sea is still contracted at $90 per barrel.
Fortunately, our basic fuel price depends on the Brent price and the exchange rate, and both are in our favour. The latest (19 June) CEF figures show over-recoveries of R2.90 for petrol and between R4.57 and R4.96 for diesel. Other good news is that last Wednesday’s CPI inflation figures showed that we are dealing primarily with a fuel price shock. Some analysts say that this does not guarantee that inflation without fuel will fall rapidly, but we are not buying a refrigerator here – the macroeconomy has no guarantees. The CPI data show that there is little second-round price pressure on other goods and services. Average food price inflation was in fact slightly lower.
If this remains the case, the reductions in fuel prices will also lower the inflation rate — and perhaps the Monetary Policy Committee will feel that it is not necessary to raise the repo rate again.
(Check out the nice inflation graphs on the Codera blog)