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We take a look at the growth in gross earnings as reported by the Quarterly Employment Survey (QES) and compare it to South Africa's official inflation rate. And we find that recently the growth in gross earnings has been less than the official inflation rate.
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Gross earnings vs inflation
The line graph below shows the year on year growth rate of Gross earnings (smoothed out by a 4 quarter moving average) to remove seasonal variations and the year on year growth rate of the quarterly CPI. And as the line graph shows gross earnings is far more volatile than the inflation rate, depending on when and how big bonuses are or additional spending by government on earnings for example paying more for IEC to conduct elections or register voters.
While the growth in gross earnings has been far higher than the official inflation rate as published by Statistics South Africa (Stats SA), in recent quarters the growth in gross earnings has declined considerably and is now well below the average level of inflation.
There is a strong belief that growth of wages leads to a similar percentage growth in inflation. The theory being that businesses and retailers and the likes know that the average person's wages has gone up by say 7%, so they will push up their sales prices by a similar percentage to take advantage of the higher wages earned by consumers. And this is why wage increases and wage deals that are settled above inflation worries economists, and government (when government themselves pay wage increases above the official inflation rate). Higher than current inflation wage increases will lead to retailers pushing up prices by higher than inflation rates, which will lead to higher levels of inflation. And if this continues inflation expectations tends to rise to, as people expect wages and inflation to keep on increasing. And since people expect high price increases, retailers can keep raising prices as it is expected. And their profit margins keep getting bigger (assuming input costs increased by less than their sales price increases).
Now the worrying thing about South Africa's recent gross earnings growth is the fact that earnings growth is currently well below inflation. What this means is consumers are now regressing. Prices are rising faster than their earnings. And if this trend keeps going, consumers are essentially getting poorer as their earnings increases are not keeping up with inflation.
All of the above is why the South African Reserve Bank (SARB) is so eager to manage the inflation expectations of South Africans. As soon as inflation gets anywhere near the top of SARB's inflation target they raise interest rates. Just to show consumers and the SA economy how serious it is about maintaining manageable levels of inflation and to anchor inflation expectations at between 3% and 6%
Now the worrying thing about South Africa's recent gross earnings growth is the fact that earnings growth is currently well below inflation. What this means is consumers are now regressing. Prices are rising faster than their earnings. And if this trend keeps going, consumers are essentially getting poorer as their earnings increases are not keeping up with inflation.
All of the above is why the South African Reserve Bank (SARB) is so eager to manage the inflation expectations of South Africans. As soon as inflation gets anywhere near the top of SARB's inflation target they raise interest rates. Just to show consumers and the SA economy how serious it is about maintaining manageable levels of inflation and to anchor inflation expectations at between 3% and 6%