What inflation targeting and Mr Creosote have in common

Many analysts expect Pravin Gordhan to make known his administration’s intention to loosen the CPI inflation targeting framework aduring his 2010 national budget presentation to parliament on February 17. Some economists believe that rising electricity prices will have significant second- and third-round effects, and push CPI inflation well outside the target bracket. The remedy for controlling inflation, it is argued, is not to be an increase in the repo rate, as this would further depress domestic demand and hence delay economic recovery and employment creation. Investec’s Annabel Bishop seems to have given this some deep thought and argues in this week’s Financial Mail that:

“It would be far better to widen the inflation target to take account of the effect of higher administered prices, especially as water tariffs are also likely to rise substantially in the future, along with costs to improve SA’s infrastructure.

The inflation-targeting band should be temporarily (and only temporarily) widened to 2,0%-2,5% around the midpoint, instead of the current 1,5%, with the midpoint itself at 5,0% or even 5,5%. Ideally, the target band should be narrowed over a few years, eventually bringing it back down to the current 3%-6%.”

Ah, yes! A long-time favourite of the state: if you’re missing the target, adjust it! Instead of the CPI inflation target bracket being 3%-6%, let’s shift it to 3%-8%. Just as adjusting your bathroom scale to negative 10kgs before weighing yourself doesn’t make you 10kgs lighter, in the same way nothing can be achieved by shifting the inflation target bracket. Alas, all that can be achieved is that the government can, under a guise of spender of last resort, accelerate its inflationary policies.

The only way inflation can be brought to within the target range – despite a doubling of the electricity price over the coming three years – is for the government to balance its budget and for the SARB to stop expanding broad money supply and credit in the economy. If this is done we will see a strong and stable Rand exchange rate, and we will see low or falling consumer prices, meaning our savings become worth more the longer it is left in the bank. This will attract foreign investment inflows and drive job creation in South Africa over the long-term.

Unfortunately we are afraid our policymakers will take the path which increases their power and influence over the economy that’ll lead to major complications further down the line. But you can only imagine what happens when you keep adjusting the scale to negative to fool people whose only way of knowing what you weigh is by checking an online scale reading. Actually, you don’t need to imagine. The guys at Monty Python already did that for you with this skit on The Meaning of Life. Caution: this clip is not for the weak stomached.