EPaper

Why is US inflation higher than SA’s?

ANNABEL BISHOP Bishop is Investec chief economist.

Since June last year, the US has had higher inflation than SA, which is an unusual phenomenon historically but due in part to the US’s high integration into the global supply chain.

The US is a large, open economy (the largest in the world) with high consumer demand, and the flow of goods and services to it has been disrupted by the dislocation of global supply chains, resulting in significant price elevation. Indeed, globalisation, or the interdependence on cross-border trading in goods and services as well as technology, information and investment flows, contributed to lowering inflation in general since the 1980s for most countries. Deglobalisation has raised price inflation.

Pressure on supply chains since the pandemic is not fully unwound yet, while the US has also had the release of pent-up demand and a strong labour market, which contributed to both demand-led and supplypush inflation this year and last.

UNUSUAL

In particular the CPI inflation rate came out at 8.3% year on year (for the month of August 2022 versus a year ago) in the US, and at 7.6% year on year in SA (both the latest releases).

US consumer price inflation has been running higher than SA CPI inflation since June last year

an unusual occurrence because on average since the mid-1960s SA’s inflation rate was double that of the US. In the eurozone, CPI inflation reached 9.1% year on year in August, the highest rate since the euro’s inception. In the UK August’s CPI increased 9.9% year on year, and on the measure of CPI including owner occupiers’ housing costs was 8.6%.

It is again unusual for SA’s CPI inflation rate to be below these measures.

But before we delve deeper into the reason, having a quick look at what consumer inflation is could be helpful. Countries around the world calculate consumer price inflation by looking at what consumers typically purchase, both goods and services, and in what quantities, then record the prices over time. This includes different types of foods and drinks, travel, and vehicle costs, as well as clothing, footwear and the price of electricity and housing. All the prices of goods and services typically consumed in the basket are then weighted according to average consumption, with different countries seeing different weights for certain items, and some differences in items. For example, food prices are typically weighted much higher in SA than in advanced countries because individuals are poorer on average and so spend a greater proportion of their income on food.

The rate at which the cost of living increases matters because those on fixed incomes lose out when the inflation rate is high, as do income earners who do not see increases in line with inflation. High inflation creates uncertainty, hurting investor and business confidence.

When real incomes weaken, economic activity does too in real terms, and when prices become distended consumer behaviour can change. Demand and supply signals become distorted, particularly when high inflationary pressures spread to other goods and services, and indeed this broadening of inflation pressures (second-round effects) has been under way.

Some advanced economies still have lower inflation rates than SA, and these include New Zealand (7.3% year on year), Canada (7%) and Australia (6.1%) in the latest prints.

However, countries that produce more of the goods they consume, particularly for bulk commodities such as food, tend to have less severe inflation rates, while those with higher rates of inflation such as the US, UK and EU tend to import more of what they consume. Consequently, high freight costs bolster inflation for substantial importers, both via producer and consumer costs.

Shipping costs have worsened inflation for some countries more than others, depending on differentiations in freight costs. Rising shipping costs have a lag time of about 18 months, which explains the high and rising inflation rates in the first half of 2022. Falling transport costs have a significant delayed effect too. Lengthy shipping destinations aggravate costs in a high-energy environment.

The unwind in generally high inflation is likely to take time, however, again due to the lagged effects mentioned.

Indeed, as fuel prices subsided globally, CPI inflation moved lower in SA from 7.8% year on year in July to August’s 7.6%, and in the US from 8.5% in July to 8.3% in August.

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2022-09-23T07:00:00.0000000Z

2022-09-23T07:00:00.0000000Z

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