When fuel prices spike people can expect an increase in inflation

Martin Endjala

Consumers may already understand the implications of higher oil prices because when fuel prices increase, a larger share of households’ budgets is likely to be spent on it, which leaves less to spend on other goods and services.

The same goes for businesses whose goods must be transported from place to place or that use fuel as a major input such as mining, agriculture and construction industries.

These were the words of Independent Researcher and Economist, Joseph Sheehama while reacting to the fuel price increment by the Ministry of Mines and Energy yesterday.

The Ministry informed the public that the petrol price will increase by N$1.20 and both kinds of diesel sold in Namibia will increase by N$1.70. As a result, the pump price for petrol in Walvis Bay will be adjusted to N$20.98 while 50PPM diesel will cost N$20.75 and 10PPM diesel will cost N$20.95 for the month of September and it will be effective from Wednesday.

Sheehama is of the opinion that higher oil prices tend to make production more expensive for businesses, just as they make it more expensive for households to do the things they normally do. So, when oil prices spike, one can expect an increase in inflation prices to spike as well and that affects the costs faced by most households and businesses.

“Inflation rate increase pushes the Bank of Namibia to increase the repo rate and so does the commercial banks. Despite, the Namibia Consumer Price Index’s 4.50 percent for August 2023 this does not mean that the Bank of Namibia cannot increase the repo rate, considering the variance in South Africa and Namibia repo rate (7.75 percent versus 8.25 percent), the variance of 50 basis points. This means that Namibia lax by 50 basis points,” he said.

Sheehama added that oil price increases are generally thought to increase inflation and reduce economic growth. While in terms of inflation, oil prices directly affect the prices of goods made with petroleum products.

Therefore, fuel prices indirectly affect costs such as transportation, manufacturing and heating. The increase in these costs can in turn affect the prices of a variety of goods and services, as producers may pass production costs on to consumers. Furthermore, high fuel prices also can reduce demand for other goods because they reduce wealth, as well as induce uncertainty about the future.

“The policymakers treated the economic shocks caused by rising fuel prices also may have played a role in the impact of the shocks on economic growth and the inflation rate. Specifically, policymakers tended to worry more about output than inflation during fuel increases and did not adequately consider the inflationary aspect of the fuel when fashioning a policy response to inflation.

Therefore, an increase in the fuel levy led to households experiencing decreased income, employment and returns to factors used for production. Looking at the production side, businesses are affected by fuel prices, particularly diesel as their input costs depend on transportation and some petroleum products. Businesses, however, shift the production costs to consumers by charging a higher price for the product,” explained Sheehama.

He further highlighted that the higher priced product would result in decreased wages, increased unemployment and increased prices of goods and services, especially food.

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