Economist warns of higher wages, higher inflation ‘vicious cycle’

2014-07-18 19:07

Demanding more wages will lead to higher food prices, petrol prices and general living expenses, says Nedbank economist Isaac Mashego.

Mashego said the recent increase in interest rates by Reserve Bank governor Gill Marcus was more a result of domestic issues than international trends.

He said the general increase in prices could be attributed to the weak rand but said the strikes are the main result of domestic prices going up.

“It’s a vicious cycle. Workers go on strike demanding more wages because the cost of living has gone up,” he said, adding that the strike action causes rating agencies to downgrade the country, reducing investor confidence and foreign currency rating.

“This in turn affects the rand negatively, causing the price of petrol and food to increase. When the cost of living increases (inflation), the Reserve Bank hikes rates to combat inflation. Then workers demand more money to pay for goods and services which then leads to more strike action,” said Mashego.

The economist said imported goods such as petrol and wheat become more expensive when the rand weakens, but the recent Amcu, Numsa and NUM strikes were domestic reasons behind higher prices which led to Marcus announcing a 25-basis point increase in the repo rate, leaving the prime interest rate used by commercial banks as a basis at 9.25%.

However, Mashego said he was surprised by Marcus’ decision to increase rates because “the high inflation is not a result of demand-side factors. Consumers’ spend was moderate and credit was also moderate.”

He said he expected interest rates to increase again in September because the Monetary Policy Committee was taking a cautionary stance.

Marcus yesterday warned that wage settlements above inflation levels posed an upside risk to the country’s economy. She said the negative outlook on inflation related to “possible wage-price spiral resulting from recent wage settlements and wage demands in excess of inflation and productivity growth” could result in future increases in interest rates.

South Africa’s inflation rate is at 6.6% well above the country’s target of 6%. She said the Monetary Policy Committee would be on a negative inflation outlook which may result in further tightening of the economy.

Marcus also said the Reserve Bank expects inflation to normalise but “there was a possibility of a bigger shock to inflation, particularly from possible higher tariff increases being granted to Eskom by the National Energy Regulator of South Africa (Nersa) from 2015.”

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