SIMON BROWN: I’m chatting now with Thalia Petousis – she is from Allan Gray. Thalia, I appreciate the early morning time. A great piece that you wrote landed in my inbox earlier in the week on food inflation, [titled] ‘Are we watching that 70s show?’ Of course, that was the last time inflation globally was at the sort of levels we are seeing now. The thing with food inflation, in particular, you make the point, is it’s a very powerful force because it touches every single person in the worst way: we have to eat, we have to pay up for food even as prices are rising.
THALIA PETOUSIS: Yes, that’s exactly right. I think something else that makes it so powerful is because when food becomes unaffordable, its impact is felt the most on low-income consumers. So the inflation basket that lower-income cohorts experience is very difficult from that that high-income people experience. If you think about here in South Africa, the inflation basket that Stats SA measures has a 20% weight towards property prices – not something that everyone in the economy engages with, certainly not often. You only buy or sell a home every few years, maybe you’re not even a homeowner.
But food inflation, as you’ve said, is something that is so basically at the consumer level that everyone engages with very frequently. I think that that’s why it makes it a very important phenomenon and in fact a very important political phenomenon.
SIMON BROWN: If we add fuel to that, energy costs even more so, I imagine the average low-income person spends proportionally a lot more of their salary on that. You make the point around the impact it has. You had an illustration where in the past in food inflation, particularly in emerging markets, we can start seeing political instability at the same point.
THALIA PETOUSIS: Exactly. So it was actually bread riots in Egypt that were the catalyst for the clashes, if you remember the Arab Spring in 2011. That was sort the catalyst. If we fast forward to the present year, we are already starting to see discontent growing, and that’s across quite a wide range of emerging markets. In India there have been active protests this year among Indian labour unions; in Spain there have been truck driver protests over the price of food and fuel; in Sri Lanka they’re in a severe sort of emergency – they’ve had crop failures, they’ve had food shortages and civil unrest. So there is a food and fuel component tying together all of these. I have many more examples, by the way.
So it becomes an intensely political phenomenon and it has resulted in riots. It has resulted in famine, in government regime changes. I think it’s something that everyone needs to be very well aware of.
SIMON BROWN: Yeah. And it comes back to that key point: it hits hard and it hits the poorest the hardest.
We are in a weird situation at the moment where our inflation came in at 5.9%. We are actually quite well behind. In the US it’s 8.3%, [according to] their last print. We are almost in a weird sense – I don’t want to say winning the inflation war – perhaps not losing as badly as other economies are at this point in time.
THALIA PETOUSIS: Yeah. I like to make the point that in the last 40 years or so South Africa’s inflation has only lagged that of the US a handful or so times, and now we are living in one of those times. My explanation for it – actually I’ve heard a lot of explanations at this point, I’ve heard that Stats SA needs to measure inflation better – is we really didn’t have the fiscal headroom to support consumers to the degree that the US did. They rolled out these grand infrastructure spending programmes. They’ve put stimulus cheques literally directly in the hands of [the] consumers.
By comparison in South Africa, okay, we did see the social release of stress grant last year, about R350 per month. Cumulatively that’s about R40 billion that was spent, less than 1% of GDP. The US spent a few trillion dollars. In doing that really what they stimulated is consumer spending, and that consumer spending comes through in inflation via demand-side inflation.
If you look at South Africa’s core CPI – strip out food and fuel – in March I think we were at 3.8% year on year. So really it points to the fact that our consumers are in a weak space.
SIMON BROWN: And we’ve seen the rate rises. We’ve got the MPC [meeting] later today, with an expectation of half a percent. We saw [US Fed chair Jerome] Powell do half a percent in the last meeting. You make a great point in the article: you say people are sort of calling it ‘Volckeresque’ in terms of what [former US Fed chair] Paul Volcker did back in the eighties; not even close. The US was up at 15%, 20% interest rates. They’re now at 1%. They are still at exceedingly low rates in a high-inflation environment.
THALIA PETOUSIS: Exactly. It’s exactly that, it hits the nail on the head. The last time US inflation was as high as it today, the interest rates were 15% – and now they are 1%. So you can’t really tell me that the central bank is doing anything bold. I think people who’ve made that statement are really overstating the point. I do think now that the Fed has raised [interest rates] by 50 basis points, it’s a small step in the right direction, a tiny step.
I think that our Reserve Bank is acutely aware of the risk to the rand, and I guess also the knock-on impact on inflation via imports if they do not at this point raise and follow – even though they’re obviously in a much trickier environment because our consumer is so much weaker, because our economy isn’t necessarily running hot in all areas – far from it.
SIMON BROWN: Yes. A last question, bringing it back to our local bond market. All of this then says to us [that] almost certainly we are going to see a rise in bond yields. That’s going to be a global phenomenon. We are not going to be immune from that.
THALIA PETOUSIS: Correct. And in fact it has already started to take place. Sort of end-March I think our long bonds, around the 20-year region, were trading at about 10.5% yields, somewhere around there. They’re now up above 11%. I think yesterday we got to like 11.1%. So really at this point the spillover that we’re seeing [is] from the Fed’s tightening cycle, from that tension and nervousness in international bond markets into our own.
US bonds have certainly been sort of mispriced for some time; I would argue perhaps even since 2008. But as that sort of sorts itself out, investors are going to be either putting more money into US bonds or just taking money out of bond funds as they see yields rising. Unfortunately, investors are often quite reactive.
So really it is going to point to tighter capital markets, it’s going to point to the Federal Reserve sucking liquidity out of what is currently or what has been a very cash-flush market,
…and that means foreigners are likely to have less money to spend on our bonds, and unfortunately we do really rely on their participation in our bond markets just because of the size of our fiscal deficit.
We need them to come in and to assist in funding our debt.
SIMON BROWN: That was Thalia Petousis of Allan Gray. I really appreciate the excellent insight.