Eskom’s decision to accept a 16 percent tariff increase for the 2012/13 year, rather than the previously agreed 25.9 percent, has come too late to do more than limit the damage to inflation expectations, according to Brait economist Colen Garrow. Wage demands and price increases are based on expectations that generally become self-fulfilling.
Garrow said, although the effect of the lower increase would be positive, it would be negligible. “Prices have this habit of being sticky when they need to be adjusted lower. Goods and services had probably been already adjusted in anticipation of the full 25.9 percent, and will probably not be discounted fully by the smaller increase in electricity tariffs. Also, the price adjustment after the revision remains a large one.”
But some economists see an earlier return to the Reserve Bank’s 3 percent to 6 percent target range for inflation.
In January the bank’s governor, Gill Marcus, said consumer inflation would remain above the range for the rest of the year. And, in her statement after the monetary policy committee (MPC) meeting, she spoke of the damaging effect of electricity inflation, which was running at over 17 percent year on year. “The determination of administered prices should not act as an inhibitor to growth and investment.”
Pressure came from other sources, including President Jacob Zuma in his State of the Nation address, trade union federation Cosatu and private sector economists. Eskom apparently noted their views and asked for the initial increase, granted by the National Electricity Regulator of SA last year, to be reviewed.
Renaissance Capital economist Elna Moolman, who initially forecast a return to the target range by January next year, yesterday brought forward her projection to October. “Inflation will be nearly 0.2 percentage points lower than it would otherwise have been, averaging about 6.3 percent this year and about 5 percent next year.”
Annabel Bishop, the group economist at Investec, calculated that instead of coming out at 6.3 percent in July, inflation would be 6.2 percent and the average for the year would fall to 6.1 percent from 6.2 percent.
But she highlighted the difference between the official inflation figure and the reality of inflation. She said the weighting for electricity and other fuels in the consumer price index (CPI) was only 1.87 percent.
She argued that, given increases in electricity prices of around 25 percent a year for several years in a row, consumers were “typically spending significantly more than 1.87 percent of their disposable income on electricity each month”.
If the weighting were more accurate July’s inflation figure would fall more substantially, she said. “A weighting of 5 percent, for example, would bring it down to 5.9 percent from 6.3 percent, while a weighting of 10 percent would see CPI inflation drop to 5.4 percent in July 2012 from the original forecast of 6.3 percent.”
The current CPI weightings were introduced in 2009 – they are traditionally updated every five years – and are based on an income and expenditure survey (IES) conducted in 2005/06. The index will be reweighted next year based on the 2010/11 IES.
Patrick Kelly, Statistics SA’s executive manager of price statistics, said that in future, the agency would be able to update the basket every three years because of the introduction of a living conditions survey. - Ethel Hazelhurst