The South African Reserve Bank has published research warning that the large, persistent fuel price shock linked to the 2026 Middle East conflict risks becoming embedded in wages and inflation expectations. Although second-round inflation pressures have generally been contained since around 2017, the current shock could undermine that pattern. The key policy distinction is between temporary price increases that monetary policy can look through and persistent pressures that warrant a response. Historical modelling using quarterly data from 2001 through the first quarter of 2026 finds that sustained fuel price pressures have tended to coincide with stronger second-round pressures. The smaller contributions from wages and inflation expectations since around 2017 are consistent with better-anchored expectations. These modelled pressures reflect multiple inflationary forces, however, not fuel prices alone. During the current shock, wage expectations have remained relatively anchored, while expectations for inflation two years ahead have edged higher. Direct fuel price increases and indirect increases in related costs need not generate persistent inflation. The greater concern is that changes in wage demands, pricing behaviour and expectations make inflation self-sustaining. Staggered price adjustments and infrequent wage data make these effects difficult to distinguish in real time. The research therefore recommends judging the need for a policy response using experience from previous shocks, the transmission of wage and inflation expectations into prices, and the speed and scale of initial price increases. Tightening prematurely risks further weakening activity, while responding too late could allow inflation to persist and require stronger action later.
South African Reserve Bank research warns persistent fuel shock could entrench inflation
South African Reserve Bank research warns that the persistent fuel price shock linked to the 2026 Middle East conflict could embed inflation in wages and expectations, despite generally contained second-round pressures since around 2017. Wage expectations remain relatively anchored, but expectations for inflation two years ahead have risen. The analysis supports looking through temporary price effects while using evidence on expectations, wages and pricing to judge whether persistent pressures require a monetary policy response.