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Blog : 12 July 2017 (Few groups main drivers of South Africa's inflation)
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In today's blog we take a look at South Africa's CPI and the main items driving it by presenting the contributions per group to total CPI in a new graphic. Only a few items drive South Africa's inflation with the rest barely contributing to overall inflation levels.
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So what's driving SA's inflation?
The graphic below shows the contribution per main expenditure category per month to South Africa's overall inflation rate.
It should be noted the residual has not been subtracted from the numbers in the graphic. CPI has a residual value that comes from rounding the published figures to one digit level. Therefore the total of each month might not add up to the official published CPI due to rounding.
We often get asked what are the main drivers of South Africa's inflation. Well to answer this one needs to look at the types of inflation first. And then look at the product groups contributing the most to the overall inflation rate. There are two main types of inflation. They are "Cost Push Inflation" and "Demand Pull Inflation".
"Cost Push Inflation" : This type of inflation refers to cases where the input costs of manufacturing or producing or selling items go up and therefore the final goods and services being sold's prices go up. This is usually outside the control of consumers. The best example to use in this case would be the petrol price, which is largely dependent on the international crude oil price and the exchange rate. A consumer in South Africa has very little to no control over these two factors,
"Demand Pull Inflation": This type of inflation refers to inflation being caused by excess demand for particular goods and services. As demand increases and supply remains relatively constant the price will increase (retailers see this as an opportunity to earn healthier profit margins). This type of inflation is a little harder to pin down with an example but here goes.
Suppose the average level of income of consumers increases suddenly (tax cuts were implemented by the National Treasury) and all citizens have more money to spend. They all decide that they will no longer be buying chicken as their main protein but will be buying beef. The amount of beef available has not changed, but more people want it. Retailers know more people want beef and they start pushing up the price of beef in order for them to maximize profits. This then starts pushing up inflation and this is what is known as "Demand Pull Inflation"
Essentially when the South African Reserve Bank (SARB) increases interest rates in order to curb inflation, they are trying to target "Demand Pull Inflation". Sadly where SARB has been getting it wrong is by increasing interest rates and making consumers struggle more even though inflation increases were out of the control of consumers. I.e it was cost push inflation pushing up prices not increased demand by consumers. In the recent past the drought led to less crops and livestock being available. Supply for these items dropped, yet demand remained the same. And in cases like this prices go up as items are sold at higher prices so that retailers/farmers do not lose a lot of money due to selling less of it. They selling less but at higher prices therefore their interests are protected.
"Cost Push Inflation" : This type of inflation refers to cases where the input costs of manufacturing or producing or selling items go up and therefore the final goods and services being sold's prices go up. This is usually outside the control of consumers. The best example to use in this case would be the petrol price, which is largely dependent on the international crude oil price and the exchange rate. A consumer in South Africa has very little to no control over these two factors,
"Demand Pull Inflation": This type of inflation refers to inflation being caused by excess demand for particular goods and services. As demand increases and supply remains relatively constant the price will increase (retailers see this as an opportunity to earn healthier profit margins). This type of inflation is a little harder to pin down with an example but here goes.
Suppose the average level of income of consumers increases suddenly (tax cuts were implemented by the National Treasury) and all citizens have more money to spend. They all decide that they will no longer be buying chicken as their main protein but will be buying beef. The amount of beef available has not changed, but more people want it. Retailers know more people want beef and they start pushing up the price of beef in order for them to maximize profits. This then starts pushing up inflation and this is what is known as "Demand Pull Inflation"
Essentially when the South African Reserve Bank (SARB) increases interest rates in order to curb inflation, they are trying to target "Demand Pull Inflation". Sadly where SARB has been getting it wrong is by increasing interest rates and making consumers struggle more even though inflation increases were out of the control of consumers. I.e it was cost push inflation pushing up prices not increased demand by consumers. In the recent past the drought led to less crops and livestock being available. Supply for these items dropped, yet demand remained the same. And in cases like this prices go up as items are sold at higher prices so that retailers/farmers do not lose a lot of money due to selling less of it. They selling less but at higher prices therefore their interests are protected.
So then back to the Rose chart and what it says about South Africa's inflation rate. As the chart shows, the four biggest contributors to South Africa's inflation rate is:
Basically South African consumers have very little control over the rate of inflation in South Africa, and South Africa has a underlying rate of inflation that regardless of all the other factors will always be there, due to lack of competition for certain products, large amounts of regulated prices and other inherent issues (such as the 10% rent increases a year belief mentioned earlier).
SARB should take all of these matters into account when deciding in interest rates as continuously targeting the consumer in order to curb inflation is hurting not only South Africa's consumers and it's economic growth rate, but its also starting to affect their credibility as many believe the last couple of interest rate increases were more to protect the vulnerable Rand than to target inflation.
- Food
- Housing
- Transport
- Miscellaneous goods and services
Basically South African consumers have very little control over the rate of inflation in South Africa, and South Africa has a underlying rate of inflation that regardless of all the other factors will always be there, due to lack of competition for certain products, large amounts of regulated prices and other inherent issues (such as the 10% rent increases a year belief mentioned earlier).
SARB should take all of these matters into account when deciding in interest rates as continuously targeting the consumer in order to curb inflation is hurting not only South Africa's consumers and it's economic growth rate, but its also starting to affect their credibility as many believe the last couple of interest rate increases were more to protect the vulnerable Rand than to target inflation.
Data sources:
www.statssa.gov.za
www.statssa.gov.za