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Inflation, interest rates and joblessness – the perfect storm

By Chris Blair

The South African economy, like many other economies around the world, has had a bumpy start to 2022. The Ukraine-Russian war, volatility in international financial markets, inflationary pressures, among other things, have caused an economic environment which threatens to spill over into a global recession. Locally, the South African economy is currently characterised by low levels of economic growth, high levels of unemployment (above 35%), inflation rates above the upper limit of the SA Reserve Bank’s inflation target (above 6%) and a cycle of increases to the repo rate (increasing the cost of credit).

The Consumer Price Index inflation rate for June 2022 is 7.4%, up from 6.5% in May 2022. More concerning than the rate being above the 6% target upper limit of the SA Reserve Bank, is the way the CPI figure is made up. According to the CPI report, published by Stats SA in June 2022, the lowest two expenditure deciles (the 20% of people who spend the least) faced the highest inflation rate, with the lowest decile facing 9.1% and the second lowest decile facing 8.5%. This indicates that presently, the worst of the local inflation is being faced by the most marginalised groups. This makes sense, as the proportion spent on basic goods such as food, fuel and transport is much larger within the spending basket of the lowest expenditure deciles. Presently, food prices are up 9%, electricity and other household fuels are up 14.5% and petrol is up 45.3%. To the poorest consumers, this has a significant impact on their ability to meet their needs, as their already stretched finances are now being asked to absorb the toughest of conditions faced by the SA economy (from an inflationary perspective).

The SA Reserve Bank has acted in accordance with its mandate to keep inflation between 3% and 6% and, as a result, they increased the repo rate by 75 basis points (0.75%) to combat some of the worst inflation figures in nearly two decades. In theory, increasing the cost of credit will reduce the demand for it and therefore slow down the pace of new money entering the economy via credit channels. This slowdown of funds entering the economy via credit channels will slow down the inflation rate, as less money chases the same amount of goods. However, what is the impact on economic growth when the economic policy is trying to slow down the rate at which credit is being used?

Credit, when used constructively can assist economic growth, as it allows credit users to take advantage of opportunities now, using money that they can pay back later. It therefore can act as a catalyst for facilitating things getting done sooner rather than later. By making credit more expensive, not as many opportunities remain financially viable. In such an environment, credit active households tend to spend less, as they not only consolidate their expenditure to accommodate their new credit repayments, but they become averse to taking out more credit. This dilemma is exacerbated further by salary increases that lag the inflation rate and that are definitely lower than the inflation rates felt by low-income earners.

Unfortunately, the net result could be dire on an economy that has the poorest citizens facing the greatest inflation, a small middle class under credit cost pressure, salary and wage increases that lag inflation and an economy that cannot create jobs. If the middle class continues to have its purchasing power eroded, there will be less demand in the economy, making desperately needed job creation even less likely due to expenditure being channelled to other expenses rather than demand-generating activities. One such example would be the demand for domestic helpers, which tend to be a discretionary spend in SA’s more wealthy households. As inflationary pressures go up, these jobs are threatened.

Until the world adjusts to the pressure placed on various supply chains by the Ukraine-Russian war and the impact it has had on global oil prices, this inflationary problem will persist around the world. Advanced economies are fortunate in that they tend to have the appropriate levels of financial protection built into their economies to weather such a storm, However, developing economies tend to suffer the brunt of such situations, as their economies are often vulnerable in times like this. The SA economy is one such developing economy, which currently is battling high unemployment, low economic growth, high inflation and increasing interest rates. The economy and population should brace for tough times ahead.

Chris Blair is CEO of 21st Century, a remuneration and HR consultancy

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