SA inflation forecasters are missing something

Domestic (i.e. South African) consumer prices are not about to shoot higher anytime soon, despite what local economists are predicting.  For those unfamiliar, the consensus among local economists is that the CPI will rise by roughly 6% in the 12 months to December 2011.  What these guys and gals keep arguing is that prices of food, fuel, and electricity are all rising, and so the costs of production and distribution will rise. This, they argue, will therefore push the entire complex of consumer prices higher also.

What they miss is that prices don’t rise in a vacuum. For domestic prices to rise across the board, consumers must be able and willing to pay higher prices.  In an environment such as today, where we see strong demand for the rand (from foreigners and locals), low money supply growth, and sharply rising food and fuel prices, consumers will be forced to pay higher prices for food and fuel, but have less money to spend on other goods and services.  Consumers will therefore not be able to pay higher prices for all products across the board, and will abstain from buying certain goods and services lower down on their value scale, forcing these prices lower.

This is recessionary, and not inflationary, so don’t rule out another interest rate cut from the Reserve Bank. We should start to see inflation forecasts revised lower in months directly ahead as economists are forced to revise their assumptions and realise that their models have been wrong, again!

‘Rising fuel prices having limited impact on CPI’

The impact that the rising fuel price is having on inflation has so far been limited, according to economists.

Calculations by BusinessLIVE have shown that the price of petrol in Gauteng has risen by R1.89 since September 1 2010. An under-recovery of about 26c a litre on petrol means that if oil prices rise significantly while the rand holds current levels, a petrol price hike of that magnitude could occur.

Petrol (energy) has a weight of almost 4% in the overall consumer price index (CPI) basket.

Sanlam Investment Management investment economist Arthur Kamp said that, while it was easy to calculate the direct impact of an increase in the petrol price on the total CPI, it was “far more difficult” to anticipate subsequent potential wage increases to productivity that may contain the impact.

Business Live