An extended period of high food and fuel prices could see inflation increasingly bleed into wage settlements in South Africa as workers attempt to compensate for their reduced purchasing power.

This would place even further upward pressure on production costs and could result in a dangerous wage-price spiral, say global analysts Moody's Economy.com in a research note.

They explain that this would occur because food and fuel costs account for a large chunk of the average household budget in South Africa.

The analysts feel that overall economic activity in South Africa is expected to continue to lose momentum throughout most of 2008.

"Business confidence in South Africa continued to weaken in April. Softer demand, continued uncertainty and elevated borrowing costs will weigh further on sentiment in the coming months," they explain.

Housing market feeling pressure

The analysts add that manufacturing is showing signs of slowing, while the housing market is also feeling the pressure.

"Rising mortgage rates and higher prices will take their toll on the country's heavily indebted households this year. Despite the broad-based domestic slowing, demand for credit has shown surprising resilience," say the Moody's Economy analysts.

Ongoing turmoil in global credit markets, high input costs, and rising wages are expected to weigh on corporate profits and local businesses' hiring and expansion plans in the coming quarters.

"Since the beginning of the year, benchmark West Texas Intermediary oil prices have surged by more than 25 percent, while prices of a number of top-line agricultural products have ratcheted up similar gains. Global energy and food prices are likely to remain elevated in the near term, while inflationary pressures will persist," conclude the analysts.

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