Electricity will heat up inflation - experts
Wage increases threaten improved outlook
May 20, 2009
By SLINDILE KHANYILE
Electricity tariffs, which are part of the administered prices basket, are going to be the biggest driver of inflation over the next few years.
Consumers would have to bite the bullet because revenue from these tariffs was required to deliver infrastructure and there was very little the government could do to control this, economists said last week.
Last week the Reserve Bank said that increases in administered prices and big wage rises threatened prospects of an improved inflation outlook as a result of the recent strength in the rand.
Eskom has asked for a 34 percent tariff increase for 2009/10.
According to Statistics SA's CPI (consumer price index) figures, electricity and other fuels increased by 30.1 percent year on year. The CPI inflation rate for March was 8.5 percent. The government has set the inflation target range at between 3 percent and 6 percent.
The overall administered fees inflation rate was 2.8 percent year on year.
An administered price can be defined as the price of a product, which is set consciously by an individual producer or group of producers and or any price, which can be determined or influenced by the government, either directly or through one or other government agencies, institutions without reference to market forces.
Other items on the administered prices basket are paraffin, petrol, telecoms fees, education and health.
Sizwe Nxedlana, an economist at First National Bank, said administered prices would cause stickiness in the downward trend of inflation. He singled out electricity and public sector wages as the major drivers.
"The infrastructure that has to be funded has to come from revenue and the end user being the consumer must pay for it," said Nxedlana. "Think of Eskom: we have never seen the kind of increases that they are asking for."
He said the implementation of the new CPI benchmark - replacing the CPI minus mortgage costs - was expected to drop inflation to the targeted band, but this process was slow, largely because of administered prices.
Dawie Roodt, the chief economist at Efficient Group, said the government could intervene by, for example, abolishing tax on fuel. "But they would have to get the money somewhere."
Annabel Bishop, an economist at Investec, said Eskom's 34 percent increase request could push up the CPI inflation rate by 0.1 percentage points, if granted.
Her CPI forecast for this year was 6.3 percent, taking into account a 20 percent tariff increase plus estimated inflation, but became 6.4 percent when using a 34 percent electricity increase.
"The price of electricity is administered and clearly nothing can be done via monetary policy to alleviate this cost pressure," said Bishop. "The impact is potentially twofold because the cost of doing business, and hence the costs of locally produced consumer goods, will also go up, although this will be muted than usual, due to the recession."
Isaac Matshego, an economist at Nedbank, added that higher electricity prices would push up inflation.
He said a lack of competition for power production exacerbated the situation.
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