After so many years in which SA could only envy the ultralow inflation rates of its rich country trading partners, it is a pleasure of sorts to see the US struggling with inflation that has spiked to 7%, its highest in more than 30 years, while our own inflation rate is still below 6%.
But only just. Latest data from Stats SA shows annual consumer price inflation jumped to 5.9% in December, up from 5.5% in November and well above the 5.7% the market had expected. The last time inflation was this high was in early 2017; the last time the monthly increase in prices in December was this high was in 2014. And while the dynamics driving SA’s inflation rate differ somewhat from those pushing up prices in advanced markets, the global environment is affecting the local landscape.
There is much to be worried about, and the Reserve Bank will no doubt be on alert when its monetary policy committee meets next week. Globally, inflation has ramped up as economies have reopened post-Covid-19, mainly because of supply side factors — though shifts in demand from services (such as entertainment) to goods, driven by the pandemic, have also played a part.
SA can only envy the full-employment scenarios in many advanced markets, where wages are being driven up by intense labour shortages and robust economic growth. Less enviable are the supply chain constraints causing shortages and price increases across a range of industries. Indirectly, SA is being affected by all these global factors.
It had already seen the inflation rate climb from an average 3.3% for 2020 to an average 4.5% for 2021. SA’s anaemic economy, with weak demand and significant spare capacity, has helped to keep the lid on price increases — as indeed has the credibility of the Bank itself, which has managed inflation expectations within a tight band, containing the behaviour of price and wage setters within the economy.
Sharp hike
However, it has been the victim of the monsoon-like weather, which has driven up food price inflation and could continue to do so through the first half of the year. And then there is fuel — which is where SA experiences the global fallout most powerfully.
On an annual basis, Stanlib economist Kevin Lings points out, SA fuel price inflation is now at 40.5% year on year. The sharp hike in petrol and diesel prices was the biggest factor in December’s spike in the inflation rate. The opposite will happen in January, when prices were cut sharply, and expectations are that fuel price inflation will moderate in 2022. But there must be a risk that it doesn’t, with global crude oil prices hitting highs of almost $90, and the rand exchange rate at the mercy of volatile global financial markets as the US tightens monetary policy and the dollar strengthens.
The possibility of exchange rate depreciation that could pass through to inflation will certainly be one of the risks the monetary policy committee will be watching. It will also be keeping its beady eye out for an electricity price increase that could be as high as 20%, and for all the other “administered prices” that tend to reflect inefficiencies in the public sector — and that help to keep SA’s inflation rate consistently higher than it should be.
December’s higher-than-expected inflation print has sparked increased concern in the market that the inflation rate could breach the top of the 3%-6% target range for a stretch in 2022. The Bank has already hiked interest rates once and has signalled that higher inflation will require further hikes. But there’s a divide between the traders and the economists, with the traders expecting multiple hikes while most economists expect a flatter, more gradual upward path for interest rates.
Monetary policy won’t provide much support for a weak economy. But it shouldn’t particularly damage its recovery either. And the more clearly the Bank can communicate the risks and the rationale for its thinking next week, the better for the economy in a year of high uncertainty, globally and locally.
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