Have we won the battle against inflation?
Inflation is always on the agenda when the Reserve Bank Monetary Policy Committee takes its interest rate decision. The bank’s stated monetary policy stance is to use interest rates to fight inflation. And – as is the case with any centrally applied polic
But we’re not so sure such a policy would work. Consider for a moment the monetary policy stance taken by the world’s largest economy, the United States. Within months of realising the country faced a critical financial challenge the US regulators had trimmed interest rates to practically zero. The problem – cash becomes trash – and interest rates can only go one way – up! South Africa’s prudent approach means there is room for further interest rate cuts should the situation become desperate. And the latest statistics suggest the inflation targeting policy has been a success.
BER research points to moderate decline
The Statistics SA measure of inflation released in July and August this year confirm the top end of the bank’s inflation target is in sight. Headline CPI declined to 6.9% in June and 6.7% in July! Expectations of softer inflation have been confirmed in the BER Inflation Expectation Survey for Q3 2009 which points to a continued downward inflation trend. The University of Stellenbosch-based economic research unit says inflation will average 8.2% in 2009 before stabilising at around 7.5% in 2010 and 2011. The BER estimates are based on a survey of trade unions, businesses, economic analysts and households. And it’s quite interesting to compare the different expectations expressed by each of these groups.
Trade unions expect inflation to average 8.3% in 2009 while business people have pencilled in 9.1%. Analysts, meanwhile, expect inflation to dip close to the Reserve Bank’s 3% to 6% inflation target. They believe full year 2009 inflation will come in at 7.2%. Analysts are particularly ‘bullish’ on inflation prospects for 2010 and 2011, where they predict 5.6% and 5.5% respectively. Businesses and trade unions expect inflation to remain above 8% in each of the next two years.
Households are at the coalface when it comes to dealing with inflation increases. We already know that the basket of goods used by Statistics SA is, at best, a partial fit for individual households. Households surveyed by the BER expect inflation to average 11.2% this year, moderating slightly over the next two years. Households have reason to be more cynical when it comes to the inflation outlook. Increases on the ground seem to outpace the official numbers by quite some margin.
Some heavy increases already pencilled in
There is plenty of inflation-plus price movement in the domestic economy at the moment. The price of fuel – despite its rollercoaster ‘up-and-down’ monthly adjustment – seems to outstrip inflation every year. Another major concern is electricity prices. We’ve been surprised at how few economists view Eskom’s forward pricing plans as a serious threat to the domestic economy. Consumers are already struggling with the 34% (and more) increase foisted on them in April 2009. And they’ve been warned to expect 40% hikes in 2010 and 2011 too. Fuel and electricity prices have a serious knock-on effect across all sectors of the economy, with prices of goods and services to the final consumer quickly resuming an upward spiral. People making use of private medical aids are also going to have to absorb inflation plus increases this year too!
The first half of 2009 has been dominated by aggressive trade union negotiation around wages, with every settlement we’ve seen well in excess of the official inflation number. Creamer Media reports the Reserve Bank governor saying that “South Africa’s wage settlements, mostly above the projected rate of inflation and in excess of productivity gains, are undermining the fight against inflation!” It’s an expected reaction. The point we should be pondering is this: If wage settlements are really so far in excess of ‘real’ inflation then why aren’t we seeing a consumer spending boom? Could it be that ‘real’ inflation is much higher than the published measure?
Editor’s thoughts: We have to admit to being quite sceptical when it comes to Statistic SA’s inflation numbers. If we consider our monthly expenditures then it seems the average annual increase is running well ahead of the ‘official’ rate. This phenomenon is probably due to the massive difference between our expenditures and those included in the basket. Are you happy with the June and July inflation numbers at just less than 7%? Add your comments below, or send them to [email protected]
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