Consumer prices increased by 7,2% during 2007. Since then, prices have increased to 11% in April, the highest rate of inflation since 2003. Sharp increases in fuel and food prices and in interest rates were the major factors that contributed to the high inflation. The increase in transport costs (+30,1%) and food prices (15,5%+ in April 2008) were the major culprits.
The how and why of inflation
There are two main types of inflation, namely cost-push inflation and demand-pull inflation. Cost-push inflation occurs when prices increase as a result of external factors. According to the FAO, world food prices increased by 35,6% since 2007. This also pushed SA food prices up to new levels. International oil prices are at the highest level ever. High international food and fuel prices are transferred to through imports. The steadily weakening rand increases the problem.
Demand-pull inflation can be summarised as “too much money chasing too few goods”. The average disposable income of households has increased from R12 000 in 1994 to an estimated R18 000 in 2008. In the last decade many people entered the mainstream economy. This so-called new, emerging middle class bolstered demand to such an extent that they are called black diamonds. A large part of the growth of the economy over the last decade was demand-driven.
More people earned higher salaries, used this to buy all the nice things they had to go without in the past, and the retail sector was quick to supply the demand. Imports also increased as traders sourced cheaper products on world markets. In the mad rush to the cash register and with one eye on share prices, companies and public utilities spent as little as possible on infrastructure development.
This soon resulted in shortages of various products – even carbon dioxide was in short supply. The worst came at the end of 2007 and early 2008, when Eskom finally confessed that they were unable to supply all the electricity needed, had to cut down on supply, and needed a 50%+ price increase to become viable again. We now have a combination of cost-push inflation – largely driven by higher international prices – and demand-pull inflation, formerly driven by increased demand. Although demand has weakened over the last months, the supply-side problems remain. The high inflation has already resulted in an increase in