Government administered prices are clearly keeping inflation in South Africa structurally higher and would constrain a move to a lower target band, says Mike Schüssler, consulting economist at Brenthurst Wealth.
Schüssler pointed to July’s CPI release, which incorporated the latest annual increases in municipal charges, including water, electricity, sewer services, refuse removal and assessment fees.
“These are all considered administered prices, as they are determined by the government and are not subject to market forces of supply and demand,” he said.
“Historically, administered prices have been considered to push South Africa’s inflation rate upwards and result in sticky inflation expectations, as a household or company’s municipal account constitutes a big chunk of its costs and increases in this expense definitely forms the perception or rather reality of inflation.”
Below he outlined some of these administered prices and how they have continued to increase over the last decade.
Statistics South Africa reported that households would, on average, pay 13.7% higher for electricity effective 1 July 2021.
The increase is more than double that of the previous year and above the average increase of 10.8% since 2009.
The average water tariff increase effective from 1 July 2021 is the lowest in the past 13 years at 6.8% y/y, though still notably above average headline inflation.
Wide discrepancies are evident between different provinces and areas, with the Free State having had the highest annual increase of 7.6% and Limpopo the lowest annual increase of 3.6%.
The average annual increase over the past 13 years was a significant 10.2%, Schüssler said.
‘No choice’ price changes
Numerous other items in the CPI basket are classified as administered prices, said Schüssler.
Fuel on its own is 4.6% of total inflation and 28% of total administered prices, said Schüssler.
“It is a large driver of inflation, and most has not come from the actual basic fuel or oil price, but from the increase in taxes, Road Accident Fund levies, transport costs, retail and wholesale margins.”
It is clear from the above analysis that households and corporates are continuously constrained by the extent of tariff increases as reflected in monthly municipal accounts, said Schüssler.
“If these tariffs, that are a growing expense for each homeowner, renting tenant or business, continue to rise at a pace much faster than average inflation and average wage increases, South Africans will be getting progressively poorer.
“Less purchasing power in the pockets of the broader population will offset to lower spending and lower economic growth, a nasty cycle that South Africa can ill afford.”
Household income can no longer keep up with administered prices, and the country is struggling to compete in the world and at home against imports, as these administered prices are a cost-push factor, he said.
Schüssler added that South African firms cannot compete with these excessive increases hanging around their necks for over a decade now.
“This is probably one of the top three reasons for South African enterprises struggling to compete and struggling to make money. Wage inflation is often blamed for South Africa not being competitive, but look at administered prices which are increasing significantly faster than both public and private sector wages.” – BusinessTech