There is an explosion in references to stagflation, the latest of many economic fashions (boom having been delegated to the dustbin of history).

But, sorry, it is far too soon for stagflation. For it describes a condition of sustained low growth or even stagnation, accompanied by an unvarying high inflation.

That doesn't come close to describing our current condition.

We may have halved our GDP growth rate overnight to two percent annualised, with more loss likely to come and it becoming semi-permanent, to the point of feeling like a durable growth step-down.

And we may have tripled our CPIX inflation rate to 10.4 percent, with another two percent or more to go, with the playout thereafter as yet hugely vague and hazy.

But that doesn't as yet qualify as stagflation.

The main reason is that we haven't as yet succeeded in transforming our long-term trend of high growth (five percent) and low growth (four percent) of the past four years into something approximating two percent growth and 15 percent inflation for any length of time.

This is not for a lack of trying.

The world has conspired to push the oil price to $130, and to increase food prices by multiples, and neither process apparently yet at an end.

So certain of our product prices are violently changing upwards. In the process they erode our purchasing power, which together with higher interest rates are suppressing GDP growth at an alarming rate.

The weaker rand in recent years only makes the inflation momentum worse, though bolstering some producer incomes and limiting the GDP growth loss somewhat.

Enough said to declare stagflation a fact?

No, vigorous policymakers are countering this trend shift and may succeed, provided political overlords don't shortly change the policy rules, or more importantly replace hard-option with soft-option policymakers.

Both the SARB and National Treasury are offering an implacable policy view to the world, at least so far.

Our budget stance should be into surplus under current generous global conditions, and so it remains. Our real interest rates should be generously positive, and so they remain.

But most importantly, as alien forces such as global oil, food, rand and Eskom relentlessly drive up their prices relative to our other goods and services prices, translating into a temporary (if increasingly intimidating) inflation bulge, so we should all stand fast and not move an inch.

Huge wish lists and unfulfilled dreams

That of course is a pipedream, in a country marked by deep skill shortages (giving such labour market power), huge trade unions (giving even larger swaths of labour strong market power), many concentrated economic sectors (giving select producers huge market power) and a central government with huge wish lists and unfulfilled dreams and huge influence to force through their transformation.

So this isn't necessarily a clever or an equal fight.

It isn't clever as there is no direct appeal to common sense (negotiate), only indirectly so (let me change your circumstances to the point of responding with the right behaviour suiting my ends).

And it isn't necessarily an equal fight, despite the intimidating size of skill shortages, unions, companies or government departments.

In the US there is an old saying. Don't fight the Fed. Of course, a Bundesbank-type Fed is even more intimidating. And one backed by the fiscal stance is so to speak firing on two turbos.

Which leaves the question about politics and the choice between soft and hardboiled eggs.

So far, we seem to have acquired policymakers which in the final moments of the current Presidential term are seemingly increasingly leaning into the wind.

Interest rates are steadily being moved higher in an attempt to prevent 'second round' effects leading to a general lift in inflation following robust first round alien price shocks.

It is a hard call. Effectively, companies should manage their cost structures more tightly, absorbing the alien shocks and any second round effects slipping through.

That means cost-cutting, more productivity gains to be engineered and probably loss of profit margin. In a market capitalist system, these choices don't come easy. Indeed, they only come as a last, not as a first, option.

As to labour, it may be a preposterous expectation, but labour isn't supposed to demand wage and salary increases beyond the SARB CPIX target of three to six percent plus a factor for real (rather than claimed or imaginary) productivity gains. If not, wage bill management by employers could only mean employment losses.

These processes are currently playing out with great vigour. Alien price shocks are pushing CPIX inflation towards 12 percent plus later this year.

Wage and salary expectations

Businesses are ever so willingly passing on any cost increases. And the strongest placed labour components (at least half of the formal labour force) are already upping their 2008 wage and salary expectations to 10-15 percent gains, with or without any productivity gains (or employer losses or windfalls to take into account).

If the macro policymakers sustain their imposing discipline, the alien price shocks will eventually subside. Commodity prices cannot indefinitely accelerate. And the secondary price-setting (wages) will not have been lifted to permanently higher rates of change.

Inflation, defined as the change in the average price level, would eventually duly ease again towards three to six percent.

Stagflation would not have taken hold on the inflation side. As to whether low growth would be durable, much would depend on the macro policy stance, whether it would let up as inflation subsided. It probably would, thereby probably giving new lift to growth (or rather reducing the recent suppression).

Currently the betting is that this will become the outcome. Until this perception changes, expressions about stagflation won't be warranted.

Rather refer independently to falling low growth and high rising inflation. The final levels where these things will settle have yet to be fully determined.

Cees Bruggemans is FNB's chief economist.


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