Johannesburg – Inflation is effectively a regressive tax impoverishing those in society who should be helped, said SA Reserve Bank Governor Lesetja Kganyago.
Kganyago was delivering an address at the University of KwaZulu-Natal on Tuesday. He explained that inflation can have adverse redistributional consequences.
“Some people can protect themselves from inflation and even profit from it. Other people are less fortunate.”
Using an example, Kganyago showed the impact of last year's 6.3% inflation figure on the cost of living. “If your salary of R6 000 went up to R6 300, you did not get a raise because you only got 5% more. You got a pay cut in real terms,” he said. “If you had R20 000 in a savings account and you earned R1 000 in interest, you are now poorer than you were last year.”
Not understanding the impact of inflation may also have consequences for salary negotiations. Employees should be able to negotiate a raise big enough to beat inflation, he explained.
He added that some earnings are better protected than others. The Labour Force Dynamics report published by Statistics South Africa showed that between 2010 and 2015, the median wage in South Africa rose by 6.9%. For skilled people, the median increased by 37.8%. Prices rose by 30%. This shows skilled workers were better protected against inflation than others.
Kganyago added that inflation also affects wealth. “For a rich South African with shares in big companies and some real estate, more inflation is not much of a problem.” Big companies can easily charge higher prices, while their foreign operations earn foreign currency. “Their equity valuations will at least stay constant in real terms.”
As for property, a house can have the same real value regardless of the price index.
However, if one depends on a fixed income, such as flows from a savings account or an annuity, inflation is expensive, he said.
“It is better to keep inflation low rather than let high inflation hurt the poor and exacerbate inequality between the people privileged with knowledge, power and assets, and those without.”
Having a low interest rate policy which raises inflation is a tax that takes money away from people lacking knowledge, power and protected forms of wealth, and gives it to borrowers and the people who sell to them, he explained.
“We have a tax system that works the way it does precisely because there are more efficient and progressive ways to transfer financial resources.”
READ: Kganyago: SA to keep targeting low inflation for lower rates
Kganyago explained the importance of continually targeting low inflation, to protect the poor. Keeping inflation low will help bring down interest rates, Bloomberg reported.
In his speech, Kganyago showed that the largest part of the interest cost is attributed to inflation.
The inflation rate charged for a loan includes expected inflation plus a real rate of interest. “The inflation part of the interest rate ensures that a lender gets their initial capital back when the loan is repaid.”
He added: “If that does not happen, then the loan is actually partly a gift because, thanks to inflation, a portion of the loan is not being paid back.”
This way a lender is paid some insurance against a borrower defaulting. “If you think inflation will be 10%, you will start with a 10% interest rate and then add these terms and risk premiums.”
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