Inflation to stay high

THE announcement on Wednesday morning that inflation is still at the upper end of the Reserve Bank’s inflation target – both the consumer price index (CPI) for urban areas and the headline CPI increased by 6%, compared to the Reserve Bank’s target range of between 3% and 6% – should not have come as a surprise.

Neither are the main culprits of the persistently high inflation rate unknown: higher transport cost and an increase in the cost of housing and utility charges.

It is interesting to note that the Reserve Bank has been warning us about an increase in the inflation rate at every opportunity during the last few months. In its latest Quarterly Bulletin, issued in September, the Reserve Bank painted a negative picture on the inflation outlook.

At first, a higher oil price and resultant rise in the petrol price was the main driver of inflation, but higher transport costs and sharp hikes in the cost of capital goods as a result of a weaker rand translated to higher producer inflation within a few months.

The producer price index increased sharply, from a low of 4.9 % in May 2013 to 6.6% in July.

The effect of higher producer cost has now spread through the whole economy. The Reserve Bank noted that an analysis of price changes based on the classification of individual consumption by purpose shows a broadening of inflation pressures in the economy.

Prices of six of the 12 categories – representing 58% of the total consumer basket – exceeded the upper limit of the inflation target rate in July.

Inflationary pressures are still present and increasing. A new factor which will affect inflation is recent high wage settlements in both the government and private sector. This brings higher cost and, eventually, an increase in consumer prices.

A regular survey by the Bureau for Economic Research at the University of Stellenbosch shows that most analysts, business representatives and trade unions expect inflation to remain around the upper level of the Reserve Bank’s target range for the next few years.

This survey calculated an average expected inflation rate for 2013 of 6%, increasing to 6.1% in 2014 and 2015 from the already higher base of consumer prices.

 - Fin24

*After chasing money on the JSE for 15 years, Adriaan Kruger is now living a relaxed lifestyle in Wilderness and lectures economics part-time at Nelson Mandela Metropolitan University. Views expressed are his own.