The power crisis should, on the one hand, be dousing inflation pressures because it is stifling economic growth and demand in South Africa.

But any price containment on this front is being undermined by the rising costs inflicted on producers and other businesses as they turn to off-grid sources of power generation when Eskom turns out the lights.

“Load shedding… implies an inflation rate impact of 0.5 percentage points in 2023 from load shedding,” the Sarb said in its latest bi-annual Monetary Policy Review.

“This implies substantial upside pressure on headline inflation in 2023 and will slow the disinflation process underway. Furthermore, these effects may be exacerbated by larger-than-modelled disruptions and supply shortages, especially in the food value chains,” the Sarb said. 

South Africa’s consumer price index picked up pace in March to 7.1% on an annual basis from 7% in February, well outside the 3% to 6% target of the Sarb, which has hiked rates by 425 basis points since November 2021 to cool inflation. 

Among other things, its concerns about the impact on inflation of the power cuts suggest that it may not be finished with its tightening cycle. 

The Sarb’s methodology and modelling to reach this conclusion are of more than passing interest.

“… in 2022, approximately 14% of business hours were lost in the industrial sector (to power cuts), while losses in the commercial and agricultural sectors varied between 11% and 12%. With load shedding expected to increase from 157 days in 2022 to 250 days in 2023, the loss in business hours is expected to rise,” the Sarb said. 

“Businesses have resorted to costly alternative sources of energy such as solar or backup power generators to mitigate the production downtime from load shedding. The latter, in particular, presents significant variable (fuel) costs, and these additional costs are likely to be passed on to consumers, adding to inflationary pressures.” 

The Sarb said it’s based its expectations on several assumptions, notably that “67% of firms use diesel generators during load shedding” and that “the cost of power from running a generator is 133% higher than that of power provided by the municipal grid”. 

“In total, 90% of the additional generating costs are passed on to final prices,” the central bank said. 

The Sarb is also fine-tuning the modelling it uses for crafting monetary policy, known as the forward-looking “Quarterly Projection Model”. Its rate decisions the past year have strayed markedly from the model’s “implied path”, underscoring uncertainties such as the impact of the power cuts on inflation. 

Changes to the model will include taking into account “changes in the country’s fiscal position” and the spillover effects of changes in fuel and electricity prices. DM/BM