With commodity prices heedlessly rising, consumers are increasingly being fleeced. This is true in many countries, not only in South Africa.

The rising oil price and falling rand are a lethal combination, with pump prices already over R8/l now, and set to rise to over R8.50/l in two weeks time. The magic R10/l can't be far away, given conditions in the global oil market where despite deteriorating fundamentals (rising inventories) financially speculative demand keeps on being fuelled by US troubles (giving rise to steadily lower interest rate and dollar expectations).

But it isn't only oil.

Our generous summer rains are giving us a 10-11-million ton maize crop this year. The windfall extends well beyond maize. Its impact can be seen in sideways trending agricultural prices such as maize locally this past year and actual food price declines already starting to shape in some areas. But global trends matter hugely.

Globally, agricultural commodity prices keep rising worrisomely. This is as much a reflection of increased protein demand as a sign of hunger for biofuel as oil substitute. But there is also healthy financial demand as speculators keep punting the asset class.

Global inventories are low. Even if weather conditions and agricultural production were to improve in the coming 18 months, there apparently remains price upside as the demand configuration remains highly supportive.

This has implications for us as export-parity prices keep rising, at some point pulling domestic prices along. Although higher beef prices are eroding demand and should see prices eventually coming off, the overall food picture is one where risk resides on the upside.

Our food price outlook should gain some support from a generous domestic supply prospect, but the worrying global price trends may yet keep disappointing us.

Three Musketeers

To these three Musketeers (oil, food and rand) we must now add the fourth musketeer, Eskom, as much directly (14 percent tariff increase and 10 percent tax levy of 2ct/kw) as indirectly (economy-wide operational losses and cost increases due to electricity interruptions).

So far, these four musketeers have pushed CPIX inflation from 3.5 percent two years ago to 8.8 percent at present. Actual pricing events already in the pipeline should push this shortly to 10 percent.

Two obvious questions are whether there is more to come, and what the consequences of all this is going to be.

Oil seems destined to go higher in the short-term, even if its global fundamentals (rising inventories) argue for a seasonal price correction. But then oil's new flywheel (the fallout from the US financial crisis and aggressive Fed mobilization) could keep oil's ascent greased for some while. There's talk of $200 oil, but futures prices give little guidance about what still lies ahead. Meanwhile, investment funds continue to flow towards the oil market).

The same thing apparently now primarily fuelling oil (US financial anxiety, policy aggression and the consequent lower interest rates and dollar) is also feeding global risk aversion that tends to penalize those countries with the wrong fundamentals most.

Though South Africa remains a great precious metal story, thereby effectively insulating us from the impact of higher oil import costs, such luck hasn't as yet undone our large current account deficit.

That 7 percent-of-GDP hole-in-the-head may in fact already be eroding as growth in real household spending and fixed investment has halved, but so far there is as yet no evidence of a declining current account deficit (the data takes months to crystalise).

As to our export prices giving us a windfall, also contributing to eroding the trade deficit, people at present seem to prefer to focus on the output losses due to electricity interruption rather than net income gains due to export windfalls.

Thus the rand seemingly remains under global attack from risk aversion, but this always with the proviso that if our trade deficit were to improve under the influence of all these factors, we could suddenly encounter less Rand weakness, depending on how capital flows respond.

This makes the rand a difficult call, seemingly heading for the proximity of 9:$ this year, but with build-in shock absorbers capable of reversing this inclination towards nearer 7:$. That is some choice.

So in the rand we have a potential turbo that may, or may not, accelerate the CPIX surge to higher levels in coming months, and that may, or may not, accelerate the CPIX descent to lower levels later in the year. The margin of error here is wide, so be forewarned.

As to food, it probably hasn't seen its peak impact on our CPIX inflation. And electricity's disruption is effectively still to come aboard in wider pricing, with Eskom also apparently looking for another 20 percent tariff increase in coming months to cover the rapidly rising costs of its many varied strategies to address current problems in which cost considerations increasingly seem to take a backseat, a complete break with the past.

If this is the primary inflation picture, it still leaves the secondary forces to be considered. Here we find ourselves in a race against time.

Unlike two years ago, the economy is no longer barreling along in an overheated condition. The spending brakes have been slammed on in stages, credit growth is rapidly backpedaling assisted by the new national credit act, and asset markets are in various stages of struggle.

It isn't a time when labour would be expected to increase its real wage. As the labour market is more flexibly organized now, with multiple year contracts and many part-timers, average wage and salary increases can probably not adjust higher as quickly as what CPIX inflation is now shooting up.

Average wage increases in 2006 were some 6.5 percent, last year they probably averaged 7.5 percent and this year they could average 8.5 percent.

But whereas CPIX inflation still averaged 5.5 percent in 2006 and 6.5 percent last year, the average this year could be nine percent if it isn't going to be 10 percent to 12 percent. Thus there seems to be a major erosion of real purchasing power underway.

With the average debt servicing burden also having increased heavily on the back of rising interest rates and household indebtedness last year, the average consumer is looking at a considerable squeeze developing.

Instead of income increasing faster than inflation by one percent or more, the reverse is going to be true by between two percent and three percent this year. And for indebted households the cash flow squeeze will be far worse compared to a year ago.

Consumers are likely to increasingly recoil from spending as their means don't keep pace with the cost of their intended outlays. Further erosion of real household consumption growth looms, it seems across the board, including non-durable and services purchases.

That's bad, suggesting GDP prospects are still sliding.

GDP forecasts probably already discount the full agricultural windfall, although there may still be an even bigger precious metal windfall ahead which could finally outperform oil import costs (but may not, as both phenomena seem to be getting their common succour mainly from the same global source, US troubles).

Meanwhile, Eskom travails keep eroding fixed investment prospects, while the four musketeers are working overtime at ravishing the consumer.

This is getting messy way beyond a simple cyclical dislocation. It is a banana peel with a difference.

Is the consumer going to take this lying down? How else could it possibly want to take it?

Some are protected through inflation-proof employment arrangements, suggesting formulas such as CPIX at mid-year forming the base for next year's salary gain. Civil servants and some private sector labour may be so covered. But out of nine-million formal sector labour, only a third is unionized, and perhaps half overall can hope to have such build-in inflation shock absorbers.

The remainder will have to look high and low for bigger remuneration gains or otherwise accept belt tightening.

There is therefore some build-in response in labour costs to sudden inflation surges, but it won't cover the entire economy equally. This suggests that the average wage gain may not stay near 8.5 percent if the average CPIX were to surge beyond 10 percent, even if wages won't entirely catch up this year. Underlying inflation should move higher, from five percent last year to nearer six percent or more this year (bearing in mind there is still productivity growth to take into account).

The SARB won't like any of this. Not the surging CPIX on account of the four musketeers, the further GDP growth erosion this may bring in its wake after already having weakened growth prospects from above five percent to well below four percent and the potential increase in underlying inflation.

"Weakening economy will be an important brake"

The weakening economy will be an important brake on real wage compensation in the productive sectors of the economy (as opposed to the politically-controlled parts), so we shouldn't immediately fear the worst for underlying inflation from private productive labour. Still, there will be effects.

If the SARB were to elect to raise interest rates into this externally driven inflation firestorm, it would worsen the growth sacrifice. But the question needs to be asked how much of the labour market is contractually insulated? And to what extent are businesses similarly protected through strong market positions and able to defend their margins against unexpected cost surges?

There is some such ability, but it isn't total. And inflation is expected to peak and than to subside, if later and from higher levels than previously expected.

Instead of expecting immediate corrective responses from the SARB, it may well opt to watch and learn. Overseas, some central banks are in emergency mode (the Fed cutting interest rate aggressively) while others are holding fire. The weakening growth outlook is something that has central bank attention in many countries, even as they watch the commodity phenomenon with growing irritation.

If only someone could call the commodity producers to order, get the leading emerging markets to grow less lustily, thank you, and get the global speculators off everyone's back like so many parasites having their fill.

If only. Meanwhile every central bank has to decide for itself what the right policy mix should be under these trying circumstances. For now, no change may still be the most likely outcome in coming months.

Cees Bruggemans is FNB's chief economist.