Deliver grants for the poor as interest rates grind higher

In the UK this week, railway and London Underground workers have been on the most widespread wage strike in three decades, snarling up traffic and transport networks. With the UK inflation rate set to climb to 11%, the cost of living has in recent months been centre stage in a way it had not been during the many years in which inflation was 2% or less.

For South Africans, the sight of workers striking over wage demands is a familiar one. The UK’s renewed experience with this serves to highlight the extent to which high inflation undermines workers’ incomes and breeds strife.

It highlights too the risk of the wage price spiral that monetary policymakers are so wary of, when supply-side shocks drive up inflation — but the behaviour of wage and price setters then keeps spiralling it up further.

This is one of the key issues that our own central bank will be worrying about, especially after the latest, worse-than-expected inflation numbers. Stats SA reported this week that the consumer price inflation rate jumped to 6.5% in May from 5.9% in April. Economists had forecasted 6.1% but they are now revising forecasts upward off the latest, higher-than-expected base.

With fuel price increases expected to continue for at least a couple of months, inflation is expected to go well over 7% in June and could average more than 6.5% for this year. The question, though, is how high will it go.

Though global factors have been the big driver so far, the outlook for coming months will depend crucially on how those wage and price setters behave in response.

The May data reflect the supply shock scenario, with food and fuel price rises together accounting for more than half of the annual inflation rate.

Transport prices were up 15.7% in May compared with a year ago, with fuel inflation at 32.5%. The prices of nonalcoholic beverages were up 7.6%, but the impact of the war in Ukraine is clear in the fact that the big drivers of food price inflation have been items such as oils and cereals for which supply chains have been disrupted by the war.

Take out food and fuel prices and the May inflation rate would have been just 4.6% — nice and close to the midpoint of SA’s 3%-6% inflation target range. Core inflation still looks well contained. But there are already signs that the inflation impetus is starting to spread more broadly. Rand weakness could be feeding through to inflation in the prices of imported goods. And wage demands are being pitched higher. Cosatu has made it clear its member unions will be upping demands for cost-of-living increases in line with the higher inflation outlook.

The Reserve Bank will need to act firmly to curb the potential price spiral. It has to contend too with the fact that if it does not keep pace with the monetary tightening in the advanced economies, the rand could weaken further and drive more inflation. It will not make itself popular but it needs to keep signalling that it will act to keep inflation expectations and price pressures under control. That means more interest rate hikes this year.

But it is not just up to the central bank. Those worst affected by spiking food and fuel prices are the poor, often unemployed households. May’s inflation rate for the poorest 10% of South Africans was 8%, the latest data show. The government’s constrained finances limit how much more it can allocate to relief programmes, but it should at least ensure the existing programmes deliver for the poor at a time of high inflation.

What makes it particularly shocking is that the R350 social relief of distress grant was not paid at all in April and May because the SA Social Security Agency failed to implement the new means-tested system the government decided on.

That hit more than 10-million poor people, many of them unemployed and without access to any strike weapon to try to protect their living standards.

The inflation data are yet another warning to the government to sort out its administrative issues.

IT WILL NOT MAKE ITSELF POPULAR BUT IT NEEDS TO KEEP SIGNALLING IT WILL ACT TO CONTROL PRICE PRESSURES