25 April 2008
editorial
Johannesburg — WHEN inflation comes in well ahead of market expectations, it's often a sign that something is going on that economists couldn't have predicted, and this time it's very likely that that something is what economists call "second-round" effects.
We know the petrol price increased by 61c a litre last month -- and the leading private sector economists whose views are surveyed for the consensus forecast usually have a pretty good handle on inflation drivers such as food prices and the exchange rate and can factor that into their predictions. What they generally can't do is to predict the extent to which fuel and food price increases have prompted wider price pressures, as businesses use these increases as an excuse to raise their prices by even more than the increase in their input costs justifies. Those second-round effects are far more of a problem for monetary policy makers than once-off, externally driven price hikes such as those in fuel and food, because once those effects start emerging, it's hard to know just how far they might go.
The second-round effects are a reflection, too, that inflationary expectations are going up, so that businesses feel they can demand higher prices and trade unionists that they must demand higher wages, because inflation is not likely to come down any time soon. And when all of that starts happening, inflation can spiral quite quickly, and stubbornly refuse to come down again. And while inflation-targeting monetary policy makers might choose to ride out the effect of higher inflation caused by factors they cannot possibly influence -- such as international oil prices -- it's very difficult for them to justify standing by once there's clear evidence of second- round effects.
So it was not only a shock that consumer price inflation hit double digits in March, for the first time in five years. It was a shock too that the 10,1% inflation rate was significantly higher than the consensus forecast of 9,7%. Price pressures clearly are going much broader. And the Reserve Bank's bleak recent forecast, which was that inflation would come down to within the target range only in the fourth quarter of next year, starts to look quite convincing. No wonder even those economists who a month or two ago were expecting interest rates to stay on hold are now predicting a further 50 basis points, or even a further 100, of rate hikes. If the Bank is adopting a textbook inflation targeting-approach, it may well have no alternative.
But rate hikes are not inevitable yet. Economic growth figures due out before the monetary policy committee's next meeting could stay its hand if growth is looking worse than expected. The committee's decision will presumably depend too on what the National Energy Regulator of SA decides about electricity tariffs early in June.
But there are some potentially brighter spots in inflation too. SA's agricultural output is looking a lot stronger and prices will start coming down in months to come. That will help, as should a slightly stronger rand exchange rate. And there's clear evidence too in the figures that by cutting demand, higher interest rates really do work to drive down prices -- witness the fact that furniture and vehicle prices declined during March, as consumers tightened their belts and demand for those durable goods dried up.
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Be very picky and choosey where you buy and what you are paying, retail still has competition, I do not know how much longer,and will ajust their prices to attract the consumer,this would have helped before,but better late than never,apply this simple principle, the more industiosly the better,dont wait for the government to try and do something about it.