Administered prices continue to keep consumer price inflation (CPI) inordinately high in South Africa, despite pressure on consumers still reeling from the recession.
CPI jumped to 6,3% in December 2009 from 5,8% in November 2009, StatsSA said on Wednesday.
Although the spike was attributed to statistical base effects caused by petrol price changes, economists and the South African Reserve Bank expect inflation to return to within the target range of between 3% and 6% by March.
Nevertheless, with the base effect stripped out of the CPI figure, inflation would still have risen to 6.2%, according to Annabel Bishop, economist at Investec. She said in a research note that this is “still a very high outcome for an economy whose demand side was likely still in recession, or at best weak”.
She noted that in September 2009 CPI was at 6,1%, and household consumption expenditure or private sector spending contracted by 2% and has been in recession for five quarters — since July 2008.
“Administered [state-controlled] price increases — from petrol to electricity, [and from] rates, taxes and water to education — are keeping inflation high in South Africa, and using interest rates to bring CPI inflation down won’t be successful,” said Bishop.
Uncertainty around Eskom’s proposed tariff hike of 35% was one of the chief reasons the Reserve Bank chose to keep interest rates steady at 7% on Monday. The impact a hike could have on the economy through second-round effects should not be underestimated, said Reserve Bank governor Gill Marcus.
The Reserve Bank’s forecast, up to the end of 2011, made allowances only for a 25% increase in electricity prices. Bishop said that South Africa’s inflation is largely structural, thanks to ever-rising administered prices and other flaws in the economy where prices do not respond to higher interest rates. This was because of “chronic shortages, ranging from skills shortages to electricity supply constraints”.
ANC alliance partners Cosatu and the South African Communist Party have consistently called for a more lenient approach to monetary policy and more aggressive rate cuts, arguing that it would help ease pressure on consumers and boost the economy. But the Reserve Bank is confident that demand pressure would remain weak for the time being, noting the fall in household consumption, retail and wholesale trade.
This could ensure that inflation remains within the band until 2011, despite electricity hikes.
But as the rest of the globe recovers from the recession, the threat of rising inflation continues to loom large. Inflation generally goes hand in hand with rapid economic growth as consumer prices rise to meet growing demand for goods, and it can ultimately slow growth if left unchecked.
Recent steps by China’s central bank, requiring banks to keep more money in reserve and thereby taking cash out of the economy, point to concerns that the county’s economy is overheated. There is also disquiet among some economists that asset bubbles are developing in China as it continues on its expansionary path.
Speaking at the Gordon Institute of Business Science earlier in the week, Adrian Saville of Canon Asset Managers argued that soaring property prices in the country could point to a bubble, similar to the one that ultimately saw the near-collapse of the global financial system in late 2008.
Saville also noted that the generous stimulus packages to aid countries in the aftermath could cause future problems. One of these could be inflationary pressure as a result of the rapid expansion of money supply, particularly in the United States, which increased by 100% in the past 18 months.
“People are acting as if inflation will not be a problem,” he said.