'Rates not the only way'

This view comes on the eve of the decision by the South African Reserve Bank's (SARB's) Monetary Policy Committee (MPC) with regard to interest rate adjustments.

The trade union contends that other options should be considered to bring inflation under control. According to the trade union's comprehensive report released today, increased production rather than increased interest rates, will "tame South Africa's inflation monster".

According to Solidarity spokesperson, Jaco Kleynhans, the SARB will make a "big mistake" if they decide to increase interest rates once again.

"We believe that this solution for high inflation has already been taken too far. Without other solutions, further interest rate hikes will only be detrimental to the economy and could lead to a situation of stagflation."

Higher inflation usually leads to a decrease in unemployment, which would eventually lead to economic growth. This has not been the case for South Africa. According to Kleynhans the South African economy is heading for so-called stagflation, where the economy has a slow to negative economic growth.

'Consumer fitting the bill'

"Stagflation usually follows in instances where a certain crisis - such as the power crisis in South Africa - leads to increased prices, which could give rise to less profitable production levels," Kleynhans said.

Solidarity's report identifies the so-called demand-pull-inflation as one of the main reasons for the country's high inflation problem.

"It is vested in the idea that inflation is increased by an increased amount of money in circulation which influences the ability of the economy to make sufficient provision. In the past two years the money supply increased by approximately 23% year-on-year, which led to larger spending.

"Simultaneously granting of credit skyrocketed while imports surpassed exports. The elements (increased money supply and higher credit-granting) meant that more money was available for consumption, but local production could not meet the demand for products, which led to increased levels of expensive imports and eventually higher inflation.

"Higher interest rates meant that people had less money to spend, but very little was done to solve problems on the production side."

Solidarity also expressed its concern that companies, especially in the retail sector, are "feeding the inflation monster" by raising prices much higher than just to make provision for expenses incurred due to increased inflation.

"The consumer is footing the bill. Production is also decreased while the producers, because of the higher sales prices of items, make sufficient profit - even if fewer items are produced."

'Cause for concern'

"It is a cause for concern that many retail companies still attain increased profits in difficult economic conditions just because they are riding the wave of inflation by increasing their prices by more than inflation. This trend will in future have to be prevented by better competition."

"Although the SARB has tried to curb inflation by means of interest rate hikes, the same approach can no longer be followed," Kleynhans explained. He is of the opinion that the increase in interest rates to control inflation which is driven by external factors (such as rising oil prices) is less effective and will only have a limited effect on inflation.

"Tito Mboweni uses interest rates as the only weapon against rising inflation," Kleynhans explained. Solidarity is of the opinion that there are other options, apart from interest rate increases, to bring inflation under control - and this is increased production.

According to Solidarity's report the most basic economic principle now has to be applied to rescue the South African economy from a further decrease in growth.

"If supply surpasses demand, prices will decrease. South Africa should now focus on expanding infrastructure and assist its people to be more productive.

"For this reason the government should now focus on the production side of the economy and increasing skills rather than simply placing money, in the form of social grants, in people's hands. When increased production is attained prices will be constrained, which will eventually also curb inflation."

- I-Net Bridge