[TOP STORY] SA’s inflation landscape


JIMMY MOYAHA: Wrapping up this morning’s conversations, looking at inflation targeting, I’m chatting now with Zandile Makhoba, an economist at Liberty. Good morning, Zandile. Thanks so much for taking the time in the morning. I just want to look at a couple of things that we’ve seen happen in the inflationary landscape [both] around the world and domestically. We know that we had UK inflation numbers out yesterday. We had US inflation numbers out on Tuesday. We’re expecting European inflation tomorrow. We are expecting South African inflation to come up soon.

I just want to have a chat on the South African inflation landscape. In light of what’s been happening recently, are we still on course when we look at this concept of inflation targeting and what the Reserve Bank is doing around that?

ZANDILE MAKHOBA: I think it’s a question that’s relevant for the rest of the world as well. We are seeing massive inflation all over the world, and what’s very interesting about inflation targeting is that it’s very good at moderating inflation that is driven by consumption behaviour and demand-side driven inflation.

It’s not so good at moderating supply-side shocks, which is exactly what we are seeing in the world right now. Energy prices have gone up, filtering into shelter, food, transport costs. And as we increase interest rates to try and deal with that, we are really not going to see the movement we are looking for in those inflation numbers. Instead, the inflation we’re seeing [is] in these essential goods which are essentially inelastic, so they don’t go down in demand with the increase in price. We’ve actually created inflation in other segments of the market, just creating a much tighter and [more] difficult household consumption environment.

Read: Too early to call SA’s inflation peak, Kganyago says

JIMMY MOYAHA: Absolutely. And that definitely is felt from a consumption perspective. If you look at the inflationary numbers that come through, you start to see that while inflation [is] at its headline level, those numbers are reported increasing and all of that. The more worrying concern is things around core CPI because, as you mentioned, that strips out the effect of food and energy pricing, [which] then speaks to the more accurate inflationary number.

Now, if we’re looking at what you mentioned around the fact that this is all supply-side inflation, or predominantly supply-side inflation, what should we then be looking at from an adjustment perspective – not just as South Africa, but as a global economy and as central banks around the world? What should we be looking at as measures or alternatives towards managing this sort of inflation?

ZANDILE MAKHOBA: I think the UK provides a very interesting example. The UK is now looking at subsidising energy prices. They’ve got this £150 billion project. They will kind of park energy bills until further notice, and look at a fiscal-side solution around this problem.

So yes, it will possibly see taxes increase in the country, obviously because they will need to fund the project that they’re now going into. But it’s a direct response to the problem, which is on the supply side, look for alternative ways of providing the energy, and look for alternative ways of making it affordable [at] the household level so that the economy can come back to maybe normal ways of behaving.

JIMMY MOYAHA: Absolutely. And in light of this, before we go into [that], I want to ask [whether] an energy subsidy is practical in South Africa. Now I ask that very particularly given the context of the South African energy-supply market and the regulation that we’re facing around alternative energy relative to the pace at which Eskom is able to ramp up its side of things. That’s the first part of the question.

The other side of it is, of course, does GDP then factor into this because, inasmuch as we want to reduce the pressure on household consumption, we do also need to increase the income of household consumption and increase the growth of the country. Now, in doing that, should we be looking at adjusting those sort of other factors that factor into it as well?

ZANDILE MAKHOBA: Just to start with the first question, is there room for us to create a subsidy? I think for a country like South Africa, our opportunities may be at looking at investment opportunities [to] deal with the capacity issue as opposed to trying to deal with the price issue first. If we are able to just create the kind of supply that allows us to then deal with the price, it might help.

The introduction of alternative energies and investment in that space is really a viable option in the context that we are in. Our ability to fund that is probably a challenge now, given that government debt has increased, but we have a solid private sector that is able to provide alternatives. And as long as the private sector and the public sector are able to find solutions together, we will be in a better place.

And then to the second part of the question, how do we deal with the GDP element? If we’re able to start investing, it will be a great boost to the GDP outlook. Right now there are still challenges around what we invest in. How do we invest, especially when the global economy is in turmoil? But we are seeing a lot of examples locally of businesses that are taking a chance and making long-term decisions now that will benefit them down the line.

So there is a ray of hope, provided that we just try to coordinate our efforts as different economic players in this landscape.

JIMMY MOYAHA: I couldn’t agree more – definitely a public and private partnership in the current climate; and the current context of the South African situation is something that could be very, very important.

Thank you so much, Zandile. That was Zandile Makhoba, an economist at Liberty chatting about inflation.

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