Inflation, interest rates and joblessness

The perfect storm.
The poorest are taking the hardest hit from inflation, while the cost of credit is affecting ‘discretionary spend’ demand that provides many with work. Image: Shutterstock

The South African economy, like many others around the world, has had a ‘bumpy’ start to 2022.

The Russian invasion of Ukraine, volatility in international financial markets, inflationary pressures and so on have caused an economic environment that threatens to spill over into a global recession.

Locally, the economy is characterised by low levels of economic growth, high levels of unemployment (above 35%), inflation rates above the upper limit of the SA Reserve Bank’s inflation target (above 6%) and a cycle of increases to the repo rate (increasing the cost of credit).

The inflation rate for June is 7.4% – up from 6.5% in May.

More concerning than these two figures being above the 6% target upper limit of the Reserve Bank, is the way these figures are made up.

According to the Consumer Price Index report published by Statistics SA in June, the lowest two expenditure deciles (the 20% of people who spend the least) faced the highest inflation rate, with the lowest decile facing 9.1% and the second lowest decile facing 8.5%.

This indicates that the worst of the local inflation is being faced by the most marginalised groups.

This makes sense as the proportion spent on basic goods such as food, fuel and transport is much larger within the spending basket of the lowest expenditure deciles.

How hard a hit?

Presently, food inflation is up 9%, electricity and other household fuels are up 14.5% and petrol is up 45.3%.

To the poorest consumers, this has a significant impact on their ability to meet their needs as their already-stretched finances are now being asked to absorb the toughest of conditions faced by the SA economy (from an inflationary perspective).

Read: Workers are borrowing more to cover transport and food costs

The SA Reserve Bank has acted in accordance with its mandate to keep inflation between 3% and 6% and, as a result, increased the repo rate by 75 basis points (0.75%) to combat some of the worst inflation figures in nearly two decades.

Credit conundrum

In theory, increasing the cost of credit will reduce the demand for it and therefore slow down the pace of ‘new money’ entering the economy via credit channels. This slowdown of funds entering the economy via credit channels will slow down the inflation rate as less money chases the same amount of goods.

This may seem logical, but what is the impact on economic growth when the economic policy is trying to slow down the rate at which credit is being used?

Credit, when used constructively, can assist economic growth as it allows credit users to take advantage of opportunities now, using money that they can pay back later. It therefore can act as a catalyst for facilitating things getting done sooner rather than later.

By making credit more expensive, not as many opportunities that were once financially viable remain viable and therefore less than the full potential of the economy is realised as certain activities have become no longer economically viable at certain interest rate levels – for example, prospective homeowners may not get the credit to buy new homes.

A closer-to-home consequence is that credit-active households tend to spend less as they not only consolidate their expenditure in reaction to their new credit repayments, but also become more averse to taking out any more credit at these interest rates.

This dilemma is further exacerbated by salary increases that lag the increasing inflation and which are definitely lower than the inflation rates felt by low-income earners.

Perfect storm

Unfortunately, the net result can be dire on an economy that has the poorest citizens facing the greatest inflation, a small middle class under credit cost pressure, salary and wage increases that lag inflation, and an economy that cannot create jobs.

If the middle class continues to have its purchasing power eroded, there will be less demand in the economy – making the desperately needed job creation even less likely, due to expenditure being channelled to other expenses rather than demand-generating activities.

One such example would be the demand for domestic helpers.

This tends to be a discretionary spend within SA’s more wealthy households. As inflationary pressures go up, these jobs are placed under pressure due to their affordability.

Until the world adjusts to the pressure placed on various supply chains by the Russia-Ukraine war and the impact it has had on global oil prices, this inflationary problem will persist around the world.

Advanced economies are fortunate in that they tend to have appropriate levels of financial protection built into their economies to weather such a storm, while developing economies tend to suffer the brunt of such situations as their economies are often vulnerable in times like this.

The South African economy is one such developing economy that is currently battling high unemployment, low economic growth, high inflation and increasing interest rates.

The economy and population should brace for tough times ahead.


Bryden Morton is executive director and Chris Blair CEO of 21st Century.


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“Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.” – Milton Friedman

Translated into South African English it reads as follows: Reserve Banks alone have the power to create inflation. It also means that the rising cost of living cannot be blamed on the war in Ukraine, although this is the popular narrative.

The USA, which created the inflation, is trying to blame it on Putin, for political reasons. If the war causes the cost of wheat to rise, and the money supply stayed constant, people will buy more cheap rice from India and less expensive wheat from Ukraine. If they spend more money on one thing, they have to spend less on something else. This is not inflation though. The popular description of inflation is “a general rise in price”. The point is – only the abundance of newly-printed currency can create a general rise in prices.

The USA enjoys the exorbitant privilege of being able to export its inflation to every nation that uses the dollar as a reserve currency. The Federal Reserve creates liquidity by lowering interest rates or by buying government bonds directly, and the Federal Government spends that cheap borrowed money into the economy, thereby raising the cost of everything in terms of the dollar. When South African companies buy oil or wheat, they have to spend more dollars on the same quantity of commodities, thereby creating a bigger demand for dollars. This process redistributes the negative effect of dollar inflation among everybody in the world who consumes commodities. The reserve currency status of the dollar serves to dilute the negative effect of dollar printing on US citizens.

Inflation in terms of the dollar is the base inflation for South Africa. The US Fed created a rise in the cost of fuel and food, and the SARB is trying to mitigate the effect by strangling local borrowers. The actions of the SARB cannot contain dollar inflation. It only has control over rand inflation. The SARB raises interest rates to stay competitive in the bond market, thereby strangling local businesses in the process. The USA basically export their unemployment problems to South Arica via this mechanism.

More than 90% of our current inflation problem was created by the US Fed. There is very little the governor of the SARB can do about that.

End of comments.



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