Despite the strike by public servants, South Africa’s inflation prospects remain good with a strong possibility of interest rates being able to remain at the current level until 2006, according to senior Absa economist John Loos.
Notwithstanding the wage dispute between the government and public servants, which is testing the resolve of the government to prudent fiscal management and inflation targeting; a rand that appears to be making limited progress with further strengthening; and oil prices that remain stubbornly above $40/barrel, Loos is optimistic that the CPIX (consumer inflation less mortgage costs) target can be achieved until well into 2006.
His reason for this in part lies in expectations of moderating labour cost increases — in spite of the strike action; signs of the government’s commitment to addressing the problem of administered prices; and low
headline inflation that serves to keep “backward-looking” inflation expectations low.
“Our forecast for the next two years allows for the possibility of the deflationary effects of the strengthened rand to wear off, for producer price inflation to rise and for food price inflation to rise to more ‘normal’ rates.
“However, low headline CPI inflation (and CPIX for that matter) coupled with the backward-looking nature of many wage and pricing agreements as well as the expectation of stronger productivity growth compared with 2003, lead us to expect a moderation of labour cost increases.
“It also should lead to the containment of many price increases of goods and services provided either as intermediate inputs or to the consumer. While these lagged effects may not drive an inflation trend they can help to sustain it for a length period of time.
“Should there be no exogenous shocks via the rand, food or oil, for instance, it is possible that inflation expectations could be reduced on a more permanent basis, and this process could be greatly enhanced by government’s efforts to address the thorny problem of administered prices such as those in the transport and communications sector,” Loos says.
“The strong possibility thus exists of interest rates being able to remain at the current level until 2006,” he adds. — I-Net Bridge