Warning over ‘price spiral’ in South Africa – what you need to know

 ·8 Sep 2022

If inflation in South Africa doesn’t come back into the Reserve Bank’s (SARB) targets, price setters will build in higher prices, and demand for wages will go up – creating a price spiral, says the deputy governor of the SARB, Rashad Cassim.

Speaking at a keynote address for the ACI Financial Markets Association, Cassim said there are two variables that need to be considered when assessing the risk of a spiral – namely, wages and the exchange rate.

He said that inflation is expected to be above targets in emerging and advanced market economies this year and the next. However, the SARB reported that apart from a marginal upward revision of growth for 2022, there was a downward revision for 2023 and 2024.

“At the same time, domestic inflation moved higher, primarily as a result of oil and food inflation.”

Headline inflation is now well above the SARB’s 4.5% midpoint objective and also outside the upper limit of the full 3−6% inflation target range, said Cassim.

“Our forecast indicates that we will be back below 6% around mid-2023, and we will reach the midpoint of our target only late in 2024,” he said.


Wages – more generally, labour costs – are important determinants of inflation as they are the biggest inputs to business costs.

But wages and inflation do not need to have a one-to-one relationship, Cassim said. If a company is required to pay more in wages as a result of inflation, it can:

  • Raise prices;
  • Reduce the number of workers;
  • Buy more machinery so the labour force is more productive; or
  • Accept smaller profit margins.

Some of these instances, however, perpetuate unemployment, and instances such as accepting smaller profit margins could jeopardise the survival of a business if market conditions are difficult.

Cassim said it is not the role of monetary policy to dictate the wage employees take home. However, the SARB does need to asses how the broader labour income can help determine if it generates unwanted inflation.

According to SARB, unit labour costs (ULC) – a measurement of the total wage bill divided by GDP that is used to show how nominal wages are rising for each unit of economic output – have come down.

Regarding the latest numbers, ULC growth has decreased to 3.6% for the first quarter of this year, which is down 4.6% from the end of 2021.

“This suggests that wage pressure on inflation has been quite benign, to date, with ULC growth below the inflation rate. However, there are still risks here that keep us alert,” said Cassim.

Nominal wages are forecast to rise from 5.6% in 2022 to 7.3% in 2023, and recent labour force surveys point to an acceleration in collective bargaining agreements and a pick-up in wage-related strike action.

The Reserve Bank previously pointed out that if striking workers are successful in their wage negotiations and salary increases are not compensated for by productivity gains, this will drive inflation up, causing the price spiral.

This could prolong the period by which inflation stays high, requiring the central bank to do more to bring it down.

Exchange rate

The SARB has been paying close attention to the exchange rate, noting the weaker terms of trade as export commodity prices moderate and higher policy rates in major economies – as the driving forces for a weaker exchange rate for South Africa.

“We have had very favourable commodity prices recently and exceptionally low global rates. This helped us set very low-interest rates. But now things are changing in the world, and South Africa, as a small open economy, has also had to adjust.”

“Part of that adjustment has been a weaker exchange rate, which is why we have seen the rand at around R17 to the dollar lately, rather than R14 or so to the dollar, where we were a year ago,” said Cassim.

He said that the SARB has to consider the resetting of global base rates and cannot act in a knee-jerk fashion to tighten policy but rather act more subtly.

If the Reserve Bank acted too tightly with monetary policy and ignored changing global rates, it could lead to a weaker rand and an increase in the cost of imported goods.

“We focus on future inflation because monetary policy operates with a lag. And while we don’t see today’s elevated inflation going away next year, we also don’t yet see inflation running out of control,” said Cassim.

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