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Blog : 19 October 2016 (Inflation Clock and what it says about SA's economy)
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We aim to continiously provide statistical information in new and interesting ways. Not always easy to do and sometimes the information available isn't always the most interesting. Anyways, today we present what we call our "Inflation Clock". We show inflation rates on a clock and delve a little deeper and come to the conclusion that South Africa's economy is in what we call secular stagnation.
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This shows how inflation is ticking along
The numbers on the clock (1-12) represents each of the 12 months of the year. The different scatters on each line represents a specific year's inflation rate for that month. For example on line 1, the blue circle represents January 2013's year on year inflation rate, if one scrolls over that blue circle it shows that the inflation rate for January 2013 was 5.4%
The 0 line shows values (2,4,6 and 8). These values represent the annaul inflation rate. The higher the inflation rate the further away the scatter will be from the 0 centre point.
Now readers might wonder what the red circles between 0-3% and 6% and higher represents. In short the white gap between 3% and 6% represents the South African Reserve Bank's inflation target. I.e the South African Reserve Bank would like all the scatters to be within the white band. Scatters outside that white band represents problems for SARB. We will discuss those problems below.
The 0 line shows values (2,4,6 and 8). These values represent the annaul inflation rate. The higher the inflation rate the further away the scatter will be from the 0 centre point.
Now readers might wonder what the red circles between 0-3% and 6% and higher represents. In short the white gap between 3% and 6% represents the South African Reserve Bank's inflation target. I.e the South African Reserve Bank would like all the scatters to be within the white band. Scatters outside that white band represents problems for SARB. We will discuss those problems below.
So why would SARB be concerned about inflation below 3%? Suppose our inflation rate is negative. I.e prices of a basket of items are cheaper now than it was a year ago. A prudent consumer would sit back and say, hold on, if I wait a month I can get this item for cheaper than what I can get it for now. So the consumer sits back and waits. Retailers struggling to sell their goods, then cut prices in order to entice consumers. Consumers see prices of goods are still dropping so they keep holding out on buying as they waiting for prices to continue falling. This leads to less consumer spending and therefore lower growth in the economy as consumer spending is not growing and boosting the economy. Japan is a country that has been struggling with this for many years. Not only is low/no inflation or deflation bad for spending and growth, since spending is lower government taxes collected on say VAT will decline as consumers are spending less. This eats away and government tax revenues too.
Why the worry about high inflation at levels above 6%? In particular in South Africa? Well high levels of inflation paired with slow growth and high unemployment is called Stagflation. Basically high levels of price increases paired with high levels of unemployment while the economy is stagnating. High levels of inflation erods the value of money. As the same amount of goods purchased today with say R100 will be a lot more expensive in 12months time. High levels of inflation can further be fueled by retailers knowing consumers are used to higher prices, who then increases prices even more to boost their margins, further eating away at the buying power of consumers. High levels of inflation will be addressed by SARB by increasing interest rates, to curb demand (and in that way they hope the drop in demand will lead to lower prices so that retailers can get rid of stock) and in that way curb inflation.
South Africa is not in a stagflation environment as it's inflation rate seems under control, with only a few months being outside the white band in the inflation clock. South Africa is however in a stagnation environment. The economy is stagnating (not really growing) while experiencing high levels of unemployment. And for South Africa it seems like we are stuck in secular stagnation. This basically means we are not in a cyclical stagnation scenario where it is a short term problem. This is a deep rooted structural problem in the South African economy. Where there is little to no growth with persistently high levels of unemployment.
South Africa is not in a stagflation environment as it's inflation rate seems under control, with only a few months being outside the white band in the inflation clock. South Africa is however in a stagnation environment. The economy is stagnating (not really growing) while experiencing high levels of unemployment. And for South Africa it seems like we are stuck in secular stagnation. This basically means we are not in a cyclical stagnation scenario where it is a short term problem. This is a deep rooted structural problem in the South African economy. Where there is little to no growth with persistently high levels of unemployment.