Inflation: who expects what, and why they say it
May 5, 2009
Is it a coincidence that trade unionists and business executives are much more pessimistic about inflation than are analysts? In his monetary policy statement last week, Reserve Bank governor Tito Mboweni referred to the inflation expectations survey by the Bureau for Economic Research at Stellenbosch University.
In the survey conducted in the first quarter of this year, respondents said inflation would average 8 percent in 2010.
But this figure masks what Mboweni referred to as "somewhat divergent inflation expectations between the different groups of respondents".
Analysts expect inflation to average only 5.4 percent next year, below the ceiling of the bank's inflation target range of 3 percent to 6 percent.
But business executives and trade union officials expect inflation to average 8.6 percent and 10.1 percent, respectively.
A possible reason is that trade unionists base wage demands on expected inflation, while businesses make plans about their prices on their expectations.
Higher inflation makes both groups look good. Business executives can report higher earnings flows in nominal terms, and trade unions can crusade for wage increases that look good until the impact of inflation on earning power is taken into account.
Based on this evidence, we can expect prices of goods to rise nearly 9 percent next year, and trade unions to take to the streets and call strikes to demand double-digit wage increases.
This explains how inflation is perpetuated, turning into a vicious spiral, which drives wages and prices higher and higher and higher and higher.
For the record, the Reserve Bank's take on inflation is that it will "follow a downward trend and average 5.4 percent in the final quarter of 2010". That is the end of Mboweni's "forecast period", which means he will have succeeded in keeping inflation below the ceiling of the target range.
Transnet's bluff called
Transnet is one of those parastatals that is accused of abusing its dominant position whenever it gets a chance.
The logistics parastatal's application for an 82.5 percent increase in its average fuel pipeline tariff is certainly another attempt by Transnet to abuse its dominant position in pipelines.
However, it is a delight to see Transnet put back in its place by the National Energy Regulator of SA (Nersa), which ruled yesterday that the company's average pipeline tariff would decrease by 11.2 percent over the 11 months to next March.
Nersa agreed with BP and the SA Petroleum Industry Association that Transnet had not followed the correct methodology when it applied for its tariff increase.
In its decision, Nersa said the law did not allow the state energy regulator to set tariffs for existing pipelines to enable a licensee to recover costs of pipelines under construction.
It is interesting that Eskom has been using the same argument as Transnet to justify increasing power tariffs: that the cost of energy needs to increase to fund its expansion programme.
However, Eskom should be funding its expansion programme via its own cash, debt or government injections. When the new power stations have been successfully built and are producing power, it can look at increasing its power tariffs.
Higher energy costs on the basis of Eskom's expansion programme will boost inflation and diminish South Africa's competitiveness.
Looking for higher power or pipeline tariffs before a new power station or pipeline is built allows whichever entity is the beneficiary of such increases to be wasteful and inefficient.
Job queue continues
There are lots of jobs going in the government in the coming weeks, as about 90 MECs will be appointing staff.
Many of the MECs may remain the same in the eight provinces where the ANC won last month's election. But all 10 ministries - plus the premiership - in the Western Cape will have new ministerial faces. It is likely that nearly all the appointments made by the outgoing ANC ministers will change.
Around the country, as many as 450 or so jobs may be going, unless the new MECs decide to keep their predecessors' staff.
Robin Carlisle, a DA member of the Cape legislature who laughed at speculation that he would become the speaker in the province - indicating that he would be the "most inappropriate" appointment in such a role - said his boss, premier elect Helen Zille, had not spoken to him about joining her government.
Alan Winde, tipped to be finance MEC, said he had not been approached "yet", but he was clear that the DA would be looking at a range of state entities associated with the Western Cape, including Wesgro, the trade and business promotion entity.
The DA believes Wesgro has not been spending money wisely and does not have a good track record of delivery. One senses there are more than a few high-paying jobs on the line.
While change is in the air in the Western Cape, it is less clear just how the emergence of the Left in the ANC will change the faces of government in the other eight provinces.
Cosatu spokesman Patrick Craven, pressed on what the trade union federation wanted from the appointments of 90 or so MECs around the country - about 80 in the remit of the ANC - said: "We are not commenting on the individual appointments because we feel that would be wrong. We are involved in consultation (within ANC structures)."
Pressed on whether this meant Cosatu would be wanting "pay-back" for supporting the ANC in the election, he insisted that the federation was not interested in its own people taking charge. Provincial cabinet appointments were "ANC responsibility", he said.
Edited by Peter DeIonno. With contributions by Ethel Hazelhurst, Justin Brown and Donwald Pressly
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