“Post-pandemic inflation” has risen to levels not seen in at least 40 years, especially in rich countries, and has led to ever louder calls for central banks to tighten monetary policy more aggressively. There is serious concern that in the US especially, inflation will result in a series of rate increases starting in March. This much was gleaned from comments in January by Jerome Powell, head of the US Federal Reserve.
Powell refused to discount the possibility that the Fed would raise rates by half a percentage point at one of its forthcoming meetings. This would be twice as much as its typical quarter-point cadence. If this happens it may set in motion a series of policy changes around the world, because the Fed has not implemented a 500-basis-point increase for more than 20 years.
There is no escaping the fact that SA remains functionally integrated into the global political economy, and part of the architecture of global finance. While we have a steady hand on the tiller in the person of Reserve Bank governor Lesetja Kganyago, the growth of a radical populist formation joined by economists and other types hiding behind masks of “economic justice” has been vocal in its demands that the Reserve Bank be nationalised, print money, and the devil take the hindmost.
Kganyago has been firm. “Given all the challenges facing SA,” he explained in 2021, “we should recognise that monetary policy is the last place where we should consider risky changes … We have a well-established inflation-targeting framework, which is delivering low interest rates and low inflation. This is the most functional part of the macroeconomic framework.”
Cruellest tax
Pressure will continue to mount on the Bank to make policy changes. The most ill-conceived pressures will most likely come from domestic forces, for purely ideological reasons and as an end in itself. For what it’s worth, there is nothing wrong with being ideological, but there is something wrong with holding onto a theory when the evidence shows the theory to be bunk. Apologies to the late Richard Feynman.
Populist domestic forces — those hiding behind the mask of economic justice — seem to have forgotten a most basic principle: that wealthy countries such as the US, Germany or Japan can print money and generally get away with it. Poorer countries, especially those with small or shrinking manufacturing and production sectors, could see a rise in the prices of basic foodstuffs. It has been said that high inflation is the cruellest tax of all. Consider the people in countries like Zimbabwe, where inflation is estimated at 747%; Lebanon at 388%; and Venezuela at 2,030%. It is unsurprising that people in these countries suffer often unbearable and austere conditions of poverty, misery and a general lack of hope for the future.
Venezuela and Zimbabwe are easy examples, but one steps onto an ideological minefield when discussing those two countries. Nonetheless, it was found in research by the Lebanon Economic Monitor (2021) that the social effect of the current crisis, “which is already dire, could rapidly become catastrophic; more than half the population is likely below the national poverty line. Those paid in Lebanese lira — the bulk of the labour force — are seeing potent purchasing power declines.”
Steady management
Plummeting purchasing power is one outcome of runaway inflation. When coupled with a rise in unemployment, an increasing number of households face difficulty accessing basic services — especially health care. We cannot ignore the fact that inflation hurts the poor more than the rich. The rich are better able to protect themselves, or even benefit from the effects of inflation. The rich have better access to financial instruments that can help them hedge against inflation, while the poor tend to rely on cash — which can lose its value quite rapidly when money is printed willy-nilly and control over inflation is lost.
Whatever the Bank does next will have to be based on steady management and a beady eye on the cost of high inflation to the poor. While Kganyago has warned against “risky changes”, it might be better to avoid reckless changes (such as nationalising the Bank as an ideological end in itself). Careful monitoring of global trends on inflation should help us understand if the coming winds of high inflation are temporary or permanent, and how either one of these will affect the poor. Until this is clear, the Bank’s priority in the short and medium term should continue to be the fight against inflation.
This should help preserve the purchasing power of citizens, especially the poor, while encouraging young and new entrepreneurs to make sound economic decisions — all of which should help spur economic recovery. Reckless policy-making can result in sudden upward spikes in inflation and a surge in interest payments for international debt, while investment could dry up and growth continue to fall. As then West German chancellor Willie Brandt said many years ago: “We must try to lift ourselves above the day-to-day quarrels … to see the menacing long-term problems.”
• Lagardien, an external examiner at the Nelson Mandela School of Public Governance, has worked in the office of the chief economist of the World Bank as well as the secretariat of the National Planning Commission.
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