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South Africa’s inflation outlook remains closely tied to global energy markets. Four months into the Strait of Hormuz supply shock, oil averaged close to $100 a barrel, while a 5.5m barrel-per-day buyer strike by China, G7 strategic petroleum releases and commercial stock draws helped avert a tail-risk demand-destruction scenario closer to $140 a barrel.Although inflation has eased from its post-pandemic peaks, recent Middle East tensions show how quickly supply-side shocks can re-emerge. For policymakers and investors, the key question is how these shocks move through the economy.Commodity markets tend to move in cycles: scarcity and high prices are usually followed by investment, new supply, weaker demand and eventual abundance. But adjustment takes time, and during that period higher energy prices can create meaningful inflation pressure. The current environment is especially difficult because the global economy has faced repeated supply shocks: Covid-19 disruptions, the Russia-Ukraine conflict, trade tensions and tariff risks, and renewed concerns about the Strait of Hormuz.Individually, these shocks lifted prices. Collectively, they have also shaped inflation expectations, raising the risk that temporary increases become persistent. South Africa is particularly exposed. Refinery capacity has roughly halved in recent years, increasing reliance on imported fuel. The country also imports about 80% of the 2-million tonnes of fertiliser it uses annually, with about one-third sourced from the Middle East. Energy disruptions therefore affect transport costs and agricultural inputs.To understand the inflationary consequences, it is useful to distinguish between first-round and second-round effects.How oil price shocks transmit to inflation in South Africa. Picture: (Ashburton ) First-round effects are the direct impact of higher oil prices on inflation. Higher oil prices feed into domestic fuel prices, lifting the transport component of the consumer price index (CPI) and headline inflation. Research suggests that a 10% increase in oil prices raises headline CPI by about 30 basis points soon after the shock, or about 40 basis points once broader spillovers are included. A sustained 40% oil-price increase could lift headline inflation by 110 to 160 basis points from the just-above-3% CPI starting point that prevailed before the US-Iran conflict.The Reserve Bank generally looks through these first-round effects because monetary policy cannot produce more oil or increase global energy supply. Its focus is whether higher fuel prices generate second-round effects that become embedded in broader inflation.Second-round effects occur when higher input costs change the pricing behaviour of firms and households. The transmission starts with diesel, a critical input for freight, agriculture and manufacturing. Diesel is not explicitly included in the CPI basket, but it is central to production costs. Fuel accounts for 35% to 55% of freight operating costs, and about 80% of South Africa’s crops, as well as 80% to 90% of fruit and vegetable production, are transported by road. Higher diesel prices therefore raise the cost of moving goods from farms to processors, wholesalers and retailers.Agriculture is also vulnerable. Diesel accounts for roughly 15% of crop production costs and is essential for planting, harvesting, irrigation and transport. Higher fuel costs pressure farming margins and can eventually translate into higher food prices.The Bank’s quarterly projection model suggests that a 10% increase in fuel prices lifts food inflation by almost 0.4 percentage points after four quarters, while core inflation rises by 0.2 to 0.3 percentage points. Overall, a 10% oil-price increase may add about 0.6 to 0.7 percentage points to inflation over time. Yet higher costs do not automatically become inflation. Between rising input costs and higher consumer prices sit the pricing decisions of firms: whether to absorb costs through lower margins or pass them on. Inflation is therefore also the cumulative outcome of microeconomic decisions made to protect profitability.The extent of pass-through depends on competition, demand elasticity and balance-sheet strength. Where margins are thin, firms are more likely to pass costs on. Food retailers are a useful example: fuel costs account for only about 1% of their cost base, but higher transport and distribution expenses can reduce operating profits by 5% to 12%, creating an incentive to raise prices. Once firms adjust prices to protect margins, inflation can spread beyond fuel and food into broader goods and services. If households and businesses then expect higher inflation, wage demands and pricing behaviour can shift, turning a temporary supply shock into more persistent core inflation.For central banks, this distinction is critical. First-round effects are often temporary and unavoidable, while second-round effects can alter behaviour and require a policy response. The SARB is therefore watching not only fuel prices but also whether energy costs are feeding into transport inflation, food inflation, core inflation and expectations. At the May monetary policy committee (MPC) meeting, the Bank made a pre-emptive 25bp hike to defend the credibility of its newly adopted 3% inflation target and anchor expectations. Market pricing points to a second successive hike at the July MPC, despite the sharp drop in oil prices on expectations that seaborne traffic through Hormuz will normalise and that Iranian oil could add to potential oversupply into 2027. Support for keeping rates on hold was weakened by second-quarter Bureau for Economic Research inflation expectations, which showed steep jumps in one-year and five-year expectations. Longer term, the cycle may require a third hike if El Niño conditions from November 2026, together with delayed energy and fertiliser pass-through, feed into food inflation and delay renewed disinflation.The welcome news is that energy shocks have historically been followed by adjustment and eventual oversupply. However, after repeated supply disruptions since 2020, the inflation outlook is unusually complex. Investors and policymakers will need to keep monitoring energy markets, trade policy, weather conditions and corporate pricing behaviour to assess whether recent shocks continue to fade or evolve into a broader inflation challenge for South Africa.Botha is the head of fixed income, and Grobler is the fixed income strategist at Ashburton Investments.
