Statistics published in the Reserve Bank’s Monetary Policy Review in May reveal that consumer prices in the more established economies have risen much slower than those in the emerging economies. For example, in 2007 in the so-called ‘advanced economies’ the increase did not exceed 2,9% in any of the representative countries listed, while the average increase across the world was 4%. Africa’s average increase (without Zimbabwe being taken into the calculation) was 6,3%. During the same period, our consumer prices rose by 8,6%. In Tanzania, headline inflation matched food inflation at 7% in 2007, while in South Africa food inflation was some 45% higher than headline inflation. I find this anomalous. After all, within the African context our economy is among the most developed, yet our inflation woes, particularly as they relate to food, appear to be deeper than those of other African countries with less secure economies. At the Reserve Bank’s presentation in Durban last week I asked the Deputy Governor what accounted for this anomaly. I did not get a compelling response, so I am none the wiser.

I also queried whether the Reserve Bank was able to measure the efficacy of its interest rate policy. What would the inflation rate be if interest rates had not been increased? This could not be answered and one wonders, therefore, what evidence there is to support the ongoing determination of the Reserve Bank that increased interest rates bring price stability. I must confess that the economic theory is beyond me, but I find it difficult to reconcile the strategy with the evidence as it appears to me. Firstly, it is acknowledged that the rise in inflation is attributable, in some, if not most part, to external factors beyond our control. The most notable of these is the oil price whose influence as a contributor to the CPIX has increased dramatically. Since this and other factors have affected inflation across the globe, why have some countries lowered their interest rates since January 2007? Of twenty-eight countries listed in the Reserve Bank’s comparative table (excluding South Africa), nine brought the rate down, sixteen increased it and three left it unchanged. The average increase was 1,18%; the average decrease across those countries which employ an inverse strategy was 2,6%. Secondly, irresponsible consumer spending and overuse of credit are not responsible for inflation. The price of fuel has already been mentioned as a major factor and this is regarded as a component of the so-called Administered Price Index which has increased to a very worrying degree, and, I suspect will rise even more once renegade municipalities have feathered their nests by implementing the Municipal Property Rates Act. Administered prices are those determined by the government and its agencies rather than the market. They also include electricity and water tariffs. I struggle, therefore, to understand how the curtailment of consumer spending controls prices which are not determined by the market. It is one thing, I suppose, to force the person in the street to be more circumspect about his or her accessing credit, but this strategy, at the same time, is placing unnecessary restriction on the engines of the economy. We cannot improve employment unless business grows, and business is constrained from growth by higher interest rates.

The Deputy Governor made the point – a perfectly reasonable and valid one – that inflation will not be contained without the co-operation of all parties who contribute towards it. Yet it is unreasonable to expect them to consider the common good when they have their own particular priorities to fulfil. We cannot, for example, expect workers and their unions to be satisfied with a sub-inflationary increase, nor expect shareholders to sacrifice their dividends by deliberately containing prices and reducing profit margins. Eskom must have increases, and the petrol price is beyond our control. So the vicious circle of higher prices and greater demands will continue until a different economic cycle comes round.

Unless, perhaps, there is government intervention in a meaningful way. The import price of sunflower oil, for example, has doubled in a short time. Local manufacturers who rely on this import cannot do much about the current price, but there is a ten percent duty on this import and that means that the income to government from this source has doubled. Were the duty to be halved, government would be or worse off than before, but the price of cooking oil could be lower. Is it also beyond government’s capacity to increase the number of foodstuffs which are not VAT-rateable so that the impact of the inflation is diminished for the poorer section of the population? After all, every price rise represents more income to government.

Sadly, it looks as if it will be left to the Reserve Bank to implement a questionable policy which does not seem to work. It is like one individual breaking wind in a particularly severe thunderstorm.

Andrew Layman: PCB CEO

This article appeared in The Witness on the 30 May 2008