Johannesburg – Inflationary pressures from wages are good in that they stimulate productivity, but they are bad in that they contribute to higher unemployment levels.
This is according to the October 2016 edition of the Monetary Policy Review, issued by the South African Reserve Bank (Sarb) on Monday.
Average remuneration growth each year, since 2011, has been 8%. This is above the average annual headline inflation of 5.4%. Unit labour cost (ULC) growth is expected to reach 7.5% in 2016, followed by 6% in 2017 and 5.7% in 2018 - all still above headline inflation.
ULCs are compiled by considering how efficiently a good or service is produced; or the productivity cost and what is paid for the labour used in the production; or the salary. By removing the average labour productivity growth of 1.2%, the average ULC growth rate is then 6.8%. This is still above inflation.
According to the review, since 2009 ULCs have grown by 70%. This is greater than the growth of headline inflation for this period at 50%.
ULC forecasts for 2016 are expected to be high, due to the poor gross domestic product (GDP) growth environment. ULC growth will slow, following better growth outcomes and “labour shedding” stated the review.
Growth is expected to normalise for 2017 and 2018. However, if GDP growth does not improve during these years, this means ULC growth will continue to be as high as levels in 2016. However, the prospect of the moderation of wages may help prevent job losses.
Inflation is expected to be above the target range of 6% and is expected to "dip back" into the target range of 3% to 6% in the second quarter of 2017. The breach of the target is mainly driven by the drought which pushed up food prices, as well as the depreciation of the rand, stated the review.
Wage and price rigidities have prevented inflation from declining as growth has declined. Inflation expectations remain close to the top of the target range - in line with expectations. Core inflation is expected to reach its highest level since 2009.
At the monetary policy forum (MPR) held at Sarb on Monday night, Sarb governor Lesetja Kganyago explained that the Monetary Policy Committee (MPC) remained data dependent when making rate decisions. The MPC looks at the balance of risks to the outlook, he explained.
“If ones contributing to lower inflation materialise or if those that contribute to higher inflation materialise, the MPC will relook at the decision taken,” he explained.
The MPC decided to hold rates in September.