There’s some not-so-bad news on the inflation front, but growth prospects are looking pretty dismal

Professor Daniel Meyer is a lecturer in the College of Business and Economics, University of Johannesburg.

In terms of the economy, inflation is one of the most important variables. Fast-rising inflation is a feared concept in macroeconomic terms. Inflation is defined as a decline in purchasing power, and a quantitative estimate of the rate at which the decline in purchasing power occurs can be reflected in the increase of an average price of a basket of selected goods and services in an economy over a specific period. Generally, rising and high inflation is bad news for consumers due to the rising cost of living. High levels of inflation could also lead to a lower level of savings.

The inflation rate reached its highest level in the past three years in May 2021 of 5.2%, but declined to 4.9% in June 2021. But should we be concerned about rising inflation?

In South Africa, inflation is currently driven by cost-push inflation and not via demand-pull inflation. Cost-push inflation is defined as a decrease in the supply of goods and services due to an increase in the cost of production and other cost factors. Inflation is therefore caused mainly by supply factors rather than by demand factors. These factors include fuel prices, electricity costs, municipal accounts, production costs for manufacturers and also rising prices such as for food.

The recent riots and protests have drastically increased transport costs, with supply chain lines under huge pressure.

What does the rest of the year hold in terms of inflation, interest rates and economic growth? Netwerk24’s group of economists predict an average inflation rate of 4.3% for 2021. If all factors such as Covid-19, civil unrest, production costs and economic conditions are taken into account, it is expected that the average inflation rate for 2021 will be between 4.1% and 4.4%.

This means the inflation rate is well under control within the Reserve Bank’s inflation-targeting band of 3% to 6%. The inflation rate for June was 4.9%, and it is predicted that it will fall towards the end of the year.

Based on this stable and under-control inflation rate, and the fact that costs and not demand drive inflation, it could be stated with high levels of confidence that the repo rate, and subsequently the prime interest rates, are not expected to increase in 2021. This is good news for the economy, the business community and the public in general.

The repo rate should therefore remain at 3.5% during 2021, and increases are only expected during 2022. According to Netwerk24’s group of predicting economists, economic growth for 2021 is expected to be positive, with a consensus of 4.3%.

The current Covid-19 situation, coupled with civil unrest, supply chain and transport problems, will negatively affect predicted growth rates. It is my personal opinion that these factors will push down growth prospects for 2021, with less investment and many businesses closing down under current conditions.

Economic growth is expected to recover some of the losses from 2020, when a negative growth rate of -7.2% was recorded. So, from a low base, it is expected that the growth for 2021 of between 3.0% and 4.5% could be achieved. These growth rates, although positive, are still too low to achieve high levels of employment.

Inflation in the US has also increased significantly over the past few months. The June 2021 inflation rate was 5.4%, higher than expected, indicating economic recovery. Continued rising inflation could lead to the US increasing its interest rates, which will affect global interest rates. DM