Get ready for more price inflation pressure
South Africa is a victim of cost-push inflation. What this means is higher prices in our domestic environment cannot be blamed on supply demand problems only. Local consumers are at the mercy of spiralling international costs which cannot be checked by hiking interest rates. If Reserve Bank Governor Tito Mboweni needs proof of this assertion he will find it in his own back yard – the South African economy. Domestic inflation has ignored the eight consecutive rate hikes implemented by the MPC and continues to surge unabated. The reason is that cost-push inflation cannot checked by hiking rates.
Will Reserve Bank governor Tito Mboweni and his fellow Monetary Policy Committee (MPC) members finally wake up to this fact? If his recent comments are anything to go by – then probably not! Commenting on the rising CPIX inflation he told reporters, “I hope the second-round effects don’t continue to rise, thereby forcing the hand of monetary authorities to tighten (policy).”
The target is simply out of range
But there is little consumers can do when faced with massive price hikes for goods that most view as essential. Analysts estimate that the recent hike in the petrol price could add a full percentage point to CPIX. Motorists were hit with a 64c per litre hike on the first Wednesday in March – and could face another 50c in April.
In addition local consumers will have to contend with the approved 14.4% hike in electricity tariffs which kick in next month. Although some municipalities have indicated they will soften the blow slightly, passing around 12% to the end user, we mustn’t forget the 2c per kilowatt hour levy that Trevor Manuel introduced in the February budget. Overall electricity will go up around 18%. And we guess that will add in the region of R100 to R150 per month (more in the winter months) to an average middle-income household budget. But the real shocker is that Eskom has just put in for another increase of 53% which they want put through as soon as possible. The National Energy Regulator will look at Eskom’s 72-page motivation before ruling on the request in about three months time. We think they’ll probably approve a special increase that will give consumers something more to think about. A 53% hike on top of the 18% already mentioned would add another R300 to R450 in monthly outgoings – and consumers are definitely going to feel that.
With CPI inflation certain to go through 10% in the next couple of months it might be time for the Reserve Bank to accept that its 3% to 6% inflation target is dead in the water. It seems pointless making policy decisions to try and bring inflation back into this range when all the evidence points to worsening inflation for the remainder of this year. Petrol prices, food prices, medical prices and electricity prices are all beyond the consumer’s control. We are already using as little as possible of these ‘scarce’ resources… So there is no ‘wriggle space’ on the demand side… We will pay the higher prices because we have to consume these goods and services.
The rand will come under continued pressure
From the Reserve Bank’s March quarterly bulletin we learn that the rand has weakened nearly 14% against a basket of currencies since the start of the year. They bulletin notes that “alongside rising international prices of petroleum and food, this continued to cloud inflation prospects.” This rand devaluation has gathered pace recently, with the currency posting five year lows against the US dollar last week – and a record low against the Euro!
Is anyone wondering why the rand continues to lose ground against international currencies despite the recent interest rate hikes? Investment Solutions Economist Chris Hart answered this question for us. The reason we expect a currency to strengthen when domestic rates are hiked is that international yield-seeking investors move money into that country. Unfortunately South Africa doesn’t attract much yield-seeking capital – and so the currency is left to its own devices to soften further despite offering a better yield!
Apart from the obvious impact on fuel prices a weakening local currency adds costs to all imported goods. And that is very bad news for the current account deficit (CAD). The trade portion of this account balances what South Africa exports against what it imports… And right now the CAD is at extremely dangerous levels. Trevor Manuel points out that the "gap of just over seven percent between our investment rate of just over 21.2 percent of GDP, compared to our 13.8 percent savings rate is the major chink in our armour — somewhat accentuated by the current turmoil on global financial markets.” And Hart sums up the current account situation with this tongue in cheek comment: “A huge current account deficit doesn’t matter until it matters…” And right now it matters!
Is there any good news?
The only good news we can think of is that economists say Mboweni will be reluctant to hike rates further when the MPC meets in April. He would be ill advised to do so with the overwhelming evidence of slower consumer expenditure across a range of industries… Simply put – higher interest rates have stunted growth but not addressed externally driven prices. The Reserve Bank is going to have to come up with another plan to fight spiralling cost-push inflation.
Editor’s thoughts:
Local consumers have endured plenty of hardship in recent months. Not only is Mboweni’s painful interest rate strategy eating our disposable income; but higher rates have not helped the local currency either. It seems whatever the Reserve Bank does the short-term inflation outlook is rather bleak. Will you be able to absorb another interest rate hike? Add your comment below, or send them to [email protected]
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