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Sep 15 2008

Trevor’s inflation assumption: a rejoinder

Published by at 6:16 pm under Opinion,South Africa

First published on my old blog on 29/3/2008. 

While we’re at it (Trevor-bashing, that is), here’s another observation…

To set the scene, here is a paragraph from Trevor’s Budget speech on 20 February this year:

“The steps taken by the Reserve Bank to bring down inflation are working. Inflation is projected to fall within the target range by the end of this year and to average 4.9 percent in 2009.” 

Now, read the extract below and then ask yourself: Did Trevor not know Eskom was about to lobby government for a 60% hike in electricity prices at the time he delivered his Budget (end-February)? (Had he known this, he would not have said inflation will drop below 6% later this year.) 

Safe to say, he didn’t know what was brewing at Eskom – with one of the most important government-determined prices in the economy – when he finalized his Budget numbers.

This much he did know (and say) on Budget day (20 February):

“Now that Eskom once again has a major investment programme to finance, its capital should again mainly be raised through debt, and paid for by users over the course of time through appropriately structured tariffs. ”

Read the sentence again, and you’ll see that he prepared the people for increases in electricity rates. But, 60%? I don’t think he had that in mind when he spoke about “appropriately structured tariffs”. 

So, what will happen to inflation, if electricity tariffs (together with petrol prices arguably the most important prices in SA) rose by 60%? 

Here is what the economists at Lehman Brothers thought would happen (extract of article published by iAfrica.com yesterday):

“We now expect CPIX inflation to peak at 9.8 percent in March, with inflation not entering the target range of 3% to 6% until Q2 next year. 

“The risks would seem to remain to the upside, especially given demands from Eskom, the electricity monopoly, to hike prices by 60 percent this year,” said the analysts. 

 

The economists said a 60 percent hike this year, followed by a large hike next year, would push inflation up just over 2 percentage points from their baseline forecast and may result in inflation staying above 6% for the next two years.

Postscript: 

Could Trevor have underestimated the financial crisis at Eskom? 

Come to think of it, in the same iAfrica.com article the Lehman Brothers economists suggested central bank governor Tito Mboweni made a mistake in January by not increasing interest rates at the time. 

My, my…now the mistakes are coming thick and fast. First Mbeki said Cabinet must take the blame for the electricity debacle, then Trevor got a range of central assumptions in his Budget wrong, ignored an upcoming Eskom tariff hike in his inflation estimates and relaxed the forex regulations amidst a mini-crisis for the rand and then Tito called the markets wrong and failed to increase rates in January. 

It’s clearly tough at the top.

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