South Africa has a problem with inflation.


One battle the South African Reserve Bank does not want to fight at the beginning of 2007 is a fight over inflation. But that is the fight it faces.

And it is a losing battle.

South Africa's consumers are borrowing and spending furiously. And this threatens to derail the Reserve Bank's goal to keep inflation within its target range.

A posting on on December 7, 2006 quoted the head of the Reserve Bank as saying that currently South Africa's inflation rate was expected to be within range "for all forecast years."

The quote was part of a story reporting that for the fourth time in six months, the Reserve Bank had raised its key lending rate. The increase was 0.5 percent bringing the rate up from its current level of 8.5 percent to 9.0 percent effective December 8, 2006. Another rate increase is possible in February 2007.

Although the Reserve Bank's language was sober-as opposed to alarmist-it did appear to understate the danger of inflationary pressures.

Consider that oil prices are down, and have been on a downward course since October 2006. In contrast, food prices in South Africa were up 9.4 percent in October 2006 with prices overall increasing 5.0 percent.

Meat prices were up a staggering 20 percent when compared with October 2005. AllAfrica said, "If meat was excluded from inflation statistics, CPIX [the consumer price index] would have dropped to 3.8 percent."

Consumers appear undeterred in their spending. A story in Business Day (Johannesburg), also on December 7, 2006 said, "Retail sales, the main indicator of consumer demand, rose 13.6 percent year-on-year in September, according to data released yesterday by Statistics SA, up from a revised 8.8 percent in August."

A local economist quoted in the Business Day story said, "Robust growth in retail sales suggests that consumers are responding slowly to the tighter monetary policy stance."

One possible sign that consumers may be responding to Reserve Bank control: A slowdown in vehicle sales. (See "Product Focus" this issue, page 2.)


The population growth rate for South...

To continue reading