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Government involvement in the economy behind increased CPI

As the Consumer Price Inflation (CPI) rate increased to 5,1% in July from 4,6% in June, South African consumers deserve more clarity from the Monetary Policy Committee (MPC) of the South African Reserve Bank (SARB) as to the future path of interest rate increases.

Analysis of the CPI shows that the current source of the increasing CPI stems from government involvement in the economy. Inefficiencies in electricity supply, provision of water, the composition of the fuel price, health legislation and provision of education are driving the CPI to unacceptable levels. The CPI of these services shot up to 11,4% in July. This means that the CPI for the other goods and services in the inflation basket stood at 3,2%, in other words way below the 4,5% and 6% levels.

UASA therefore calls on government to drastically increase its efficiency in order to keep CPI at bay, as well as to the MPC to explain to consumers how the CPI can be kept at acceptable levels.

Consumers need guidance from the SARB on what they can do to reduce the rate at which CPI increases.

Thus far the SARB has only stated what prices are doing while warning that they will act to limit the pace of price increases; but it never provided any guidance on how CPI can be reduced. Given that the MPC apparently diverted from its previous policy, this is becoming very relevant.

Previously the MPC stated that it would follow a flexible policy, meaning that it would not increase interest rates if a CPI increase to above the ceiling of 6% were temporary and short-term in nature.

However, the MPC said the following in its latest statement: “With risks and uncertainties at higher levels, the MPC will continue to be vigilant and will not hesitate to act should there be second-round effects that take us significantly away from the midpoint (4.5%) of the inflation target range.”

Clarity is needed as it is possible that CPI can divert significantly from the 4.5% midpoint level due to second-round effects, but at the same time CPI may remain below 6% or increase to above 6% for a few months. Will the MPC raise interest rates under these circumstances?

If so, it may add to the unacceptable high unemployment rate of 37,2%.

For further enquiries or to set up a personal interview, contact Andre Venter at 083 251 3274.