Don’t get it

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By Cees Bruggemans

It has not quite sunk in, except at the SARB.

CPIX is gunning for 12.5%, once past Eskom’s 60% tariff increase. Wage earners and businesses can be expected to desperately defend their real incomes and profit margins.

So give me a 12.5% wage increase, or more moderately, compensate me for the average CPIX inflationof 11% over the next twelve months of 11%. And let’s pass on to customers all cost increases we can’t absorb through cost-cutting and other productivity gains.

If we are running 3%-6% inflation targets, we can’t do anything about primary external price shocks (oil, food, rand, Eskom). We do, however, want to prevent ‘secondary’ price effects and rising inflation expectations becoming embedded permanently. This implies something very simple.

Let’s assume our annual productivity gain to be somewhere in the zero to 3% range (zero for some, and up to 3% for others, with an average of 2%). The SARB’s inflation target suggests underlying unit labour costs should increase at most by 5%-6%. Adding back the productivity gain suggests wage increases of 5%-9% maximum.

Those with zero productivity gains (there are many) shouldn’t qualify for 9% wage increases, while those with 3% or better productivity gains shouldn’t get wage increases of as little as 5%.

Yet guess what happens in an economy pressed to the edge of recession, if not into it?

The most productive workers in the private sector carry the full brunt of economic slack, more competition, losing jobs, and working for employers under enormous pressure to contain costs.

Chances are excellent those workers will be made to work harder, improving productivity, yet getting only a small low single-digit wage increase.

But the public sector and hangers on, where productivity gains are rather low, may well just refer to June’s CPIX number and claim an 11% increase (after allowing for at least a 0.5% real gain).

These are confusing realities in a system that shouldn’t be demanding more than 7% average wage increases this year. Yet the targeted average is already 8.5%, with skilled professions suffering shortages easily requiring more. And that is with CPIX of 10% in mind. What is looming is the inflation bulge taking us over 12% if Eskom’s 60% tariff hike materialises and oil and food prices still rise further.

Regarding Eskom tariff proposals, SARB inflation targets and implied maximum wage gains, I am reminded of the Zimbabwean gentleman some years ago reportedly receiving a demanding letter from his local Receiver of Revenue, to which he responded as follows:

“What is this ‘income tax’? I haven’t asked for it, don’t think it a good idea, don’t want it. Please don’t write me again.”

Sure, chum, any time. The proposed 60% Eskom tariff increase is also not welcome. Unfortunately, reality has already bypassed us. With costly options to address electricity issues decided upon left and right, and electricity demand needing compression, the simple expedient of a 60% tariff increase is the stark reality, unpalatable as it may be.

As to limiting wage and salary demands to 7% this year, all the convoluted wording used so far doesn’t seem to connect. Yet one is not supposed to get compensation for higher oil, food and electricity tariff increases.

These externally-induced cost increases are impoverishing us and should be recognised and absorbed as such. That is the reality of a 3% – 6% inflation regime.

Not acceptable?

Would then higher wage-driven inflation be more acceptable, undermining our wellbeing longer term, probably by a lot more than the average 3% now given up to oil sheiks, global farmers and Eskom?

These trade-offs are hardly being made explicit in our daily discourse. Presumably politically unpalatable.

Instead, we are asked inane questions. Why are they raising interest rates? Surely they can’t undo the oil, food and Eskom price shocks?

Of course they can’t. But they can make you accept a wage increase in tune with 3%-6% long-term inflation, after allowing for productivity. You are supposed to passively watch the commodity price shock entering, coursing through and exiting the inflation data without responding.

Now try to tell THAT to civil servants, unions, skilled cadres in short supply, executive managers and the poor. And to business sitting on pretty margins.

We just don’t seem to fully appreciate the meaning of secondary price effects that aren’t to be condoned.

And if we got this message first time, interest rates needn’t rise as they now do. But because we don’t get it, countervailing pressure is being applied to have the economy impose its own internal discipline that can’t be sidestepped.

An inflation shock is a messy business, especially if there is a fundamental lack of understanding as to what that requires from all role players.

Desist, please.

It is a film currently playing to full houses in every emerging country, with roughly similar results. Pain. Outrage. Riots even. Yet no easy options.

Source: Cees Bruggemans, FNB, April 29, 2008.

 

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