It is ingrained in the national consciousness that the only way to deal with inflation is for Tito Mboweni to use increasingly large clubs to clobber the consumer with higher and higher interest rates.
But drill down a little from the headline 10,4% CPIX inflation announced last week, and a different villain emerges.
There is a chunk of inflation, mainly food and fuel, which is out of anyone’s control.
But about 20% of the CPIX is made up of administered prices, those regulated by government, and it is doing a pathetic job of keeping these prices in check: administered prices, as measured by Stats SA, have been increasing at a mind-numbing 14,5% — 8,5% higher than the Reserve Bank’s 3% to 6% target range.
If government was doing its job, CPIX could be two percentage points lower, the implication being that interest rates would also be two percentage points lower.
Total household debt, as measured by Unisa’s Bureau for Market Research, stands at R1,1-trillion. A two percentage point reduction in interest rates could save households R22-billion a year or R1,7-billion a month.
According to T-Sec economist Mike Schussler, administered prices make up more than 20% of total CPIX.
‘A lot of prices are either regulated or controlled [to a certain extent] by government,†he said. ‘This is one area, other than interest rates, where government can take a role in decreasing inflation,†he said.
Other economists agree. ‘What has gone amiss is the pressure of administered prices on inflation,†says Stanlib chief economist Kevin Lings.
Lings also points out that the consumer purchases of items like appliances and vehicles are in fact working to lower inflation. According to Stats SA, for instance, the cost of appliances was down by 2,3% while actual vehicle costs were down by 0,9%.
Ironically, while the cost of these items are declining, says Lings, additional interest rate hikes ensure that people do not purchase them.
The effect of administered prices on the overall CPI is difficult to quantify, since a large number of categories that form the index in one way or another incorporate administered prices, argues Lings.
Housing includes sanitary fees, refuse removal, assessment rates, water and university boarding fees. Fuel and power includes the price of electricity and paraffin. Medical care includes public hospital fees.
Communication includes telephone calls, telephone rent and installation, postage, cellphone connection fees and cellphone calls. Education includes school fees and university or technikon fees. Transport includes petrol, public transport and motor licences and registration. And recreation and entertainment includes your television licence.
According to Stats SA the chief contributors to the hefty CPIX for administered prices are the annual contributions in the price indices for petrol (9,5%), electricity (1,2%), school fees (1,1%), water tariffs (0,9%), assessment rates (0,9%), paraffin (0,8 %) and tertiary fees (0,5%).
A large portion of the petrol price is controlled by government and not related to crude oil and refining costs.
This includes the fuel tax that has increased from R1,21 to R1,27 year on year, and the retail margin that has increased by about 25%, from 48c a litre, to 60c a litre.
A concern in South Africa’s current inflationary environment, says Lings, is that interest rate hikes work well against these consumer items but not against the massive pressures driven largely by global trends.
‘That is perhaps why there is a feeling that interest rate hikes aren’t working,†he explains.
Given the conundrum South Africa faces, Lings argues that government institutions could be more involved in assisting the South African Reserve Bank in reaching inflation targets.
‘In the current circumstances there is a limit to what interest rate hikes can achieve so we criticise the Reserve Bank, but they are just fulfilling their mandate,†he says. ‘So why not shift focus to other policy tools like other countries have done to address the issue?â€
He argues that a re-examination of industrial, competition and trade policy should be explored, as well as deregulation of certain sectors of the economy. ‘Certain industries couldn’t price things so easily with increased competition.â€
Schussler told the Mail & Guardian that the average household and businesses will feel the effects most severely.
‘We are forecasting a hefty increase in assessment rates, increases for Eskom and in Johannesburg we expect an 8,2% increase in water rates,†he says. He says that there is also the likelihood of increases for public transport.
‘These are all things that consumers have no control over.â€
Schussler acknowledges that some of the costs will simply have to be passed on to the consumer, especially in the realm of power and transport. But, he says, better control should be exercised over the degree to which they increase and their resultant effect on inflation.
Alternatively Schussler argues that the price of things like power should be removed from the items in the CPI basket in the short term.
‘We should have followed a more doctrinal approach to controlling inflation rather than just left it to the Reserve Bank, because interest rates have no effect on administered prices,†he says.
The Bureau for Market Research could not give a figure for the total asset base of South African consumers as measured against current debt. According to the Reserve Bank, however, net wealth of households, including fixed and financial assets, came to more than R3,8-trillion in 2005.
Total debt for households in the same period stood at R693-billion.
