State-administered prices are clearly structurally keeping inflation higher in South Africa and would constrain a transition to a lower target range, says Mike Schüssler, consulting economist at Brenthurst Wealth.
Schüssler pointed to the July CPI release, which included the latest annual increases in municipal taxes, including water, electricity, sewerage, garbage disposal and assessment fees.
“These are all administered prices as they are set by the government and are not subject to market forces of supply and demand,” he said.
“In the past it was believed that administered prices would drive South Africa’s inflation rate up and lead to sticky inflation expectations, as a household or company’s communal account is a large part of its cost and an increase in those costs is definitely a perception, or rather a reality of inflation. “.”
Below he outlined some of these administered prices and how they have continued to rise over the past decade.
Statistics South Africa reported that households would pay 13.7% more for electricity on average from July 1, 2021.
The increase is more than twice as high as last year and above the average increase of 10.8% since 2009.
The average water tariff increase from July 1, 2021, at 6.8% year-on-year, is the lowest in 13 years, but is still well above average overall inflation.
Large discrepancies are evident between different provinces and areas, with Free State having 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 clear 10.2%, said Schüssler.
‘No choice’ price changes
According to Schüssler, numerous other items in the CPI basket are classified as administered prices.
Statistics South Africa’s Administered Price Index contains the following items with a cumulative weighting of 16.2%: There is a trend towards broader prices.
Fuel alone accounts for 4.6% of total inflation and 28% of total administered prices, said Schüssler.
“It’s a big driver of inflation, and most of it is not due to the actual price of basic fuel or oil, but rather to increases in taxes, the road accident fund levy, transportation costs, and retail and wholesale margins.”
From the above analysis it becomes clear that households and companies are continuously restricted by the extent of the wage increases, which are reflected in the monthly municipal bills, said Schüssler.
“If these tariffs, which are a growing burden on any homeowner, tenant or business, continue to rise much faster than average inflation and wage increases, South Africans will get poorer and poorer.
“Less purchasing power in the pockets of the wider population will compensate for lower spending and lower economic growth, a vicious cycle that South Africa can hardly afford.”
Household income can no longer keep up with administered prices, and the country is battling imports both domestically and globally as those administered prices are a cost, he said.
Schüssler added that South African firms cannot keep up with these excessive increases that have been hanging on their necks for over a decade.
“This is probably one of the top three reasons South African companies struggle to compete and make money. Wage inflation is often blamed for keeping South Africa uncompetitive, but look at administered prices, which are rising significantly faster than public and private sector wages. “
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