By Glenn Ashton · 3 Jun 2009
Inflation is generally described as too much money chasing too few goods. This is based upon a central tenet of economics, which states that as goods become scarce they become more valuable, and vice versa. Humbug, I say.
We have recently seen a steady rise in levels of consumer inflation in South Africa. A major driver of inflation has not been properly identified in the media, by economists or even amongst those whose aim is to regulate national economic policy, is the influence of the corporate profit model.
The aim of large corporations is to maximise profit. This is managed by reducing input costs such as labour and raw materials while extracting as much value from them as possible, maximising return for shareholders.
Inflation targeting is a centrepiece of South African economic policy. The Reserve Bank of South Africa sets out an estimated target range within which it wishes to contain inflation. It then uses financial instruments such as interest rates to attempt to control that target range.
If, for example, the Reserve Bank wishes to keep inflation below 6 percent and sees that it is increasing above this level, it traditionally deals with the problem by increasing interest rates. This makes money more expensive, forcing reductions in borrowing, thereby decreasing the amount of money in circulation, thus theoretically reducing inflation. The reality is that this is only a theory.
Inflation targeting by central banks is often little more than simply fiddling around the edges of monetary policy. Inflation is, in fact, driven by forces that lie completely outside of these relatively blunt instruments. Lets examine some issues.
The aim of any investor is to beat the bogey of inflation and its erosion of wealth. Those with available money – capital - aim to gain a return on their investment that is greater than inflation. So putting ones money under a mattress, or even in a bank is a bad idea. If money earns four percent interest and inflation is at six percent you lose. Even earning eight percent is useless if interest is taxed, as it is in most places.
Therefore most investment is directed towards the stock market – equities. Otherwise instruments like unit trusts, which are partially or wholly invested in the stock market, or more arcane mechanisms like commodity trades, futures, bonds and derivatives are used.
In order for a company or corporation to attract investment – capital – to grow its business, it must earn a return that beats inflation. Otherwise speculative money will move elsewhere. This appears fair within the internal logic of the purportedly free neo-liberal market system. However, in developed or emerging economies, and especially in South Africa, important sectors of the market are controlled largely by monopolies, duopolies or cartels. This has historically been the case in energy, banking, mining - and perhaps most relevant to the majority of South Africans - the food market.
South African consumers are largely at the mercy of powerful players in the distribution chain. Agricultural processors like millers have inordinate influence on market prices and collusion has been found as far as price fixing goes in that sector. The dairy industry has also had questions asked about collusion. Two main players, with little evident competition, control the sugar industry.
There are several large food manufacturers and distributors, which dominate that sector of the market. They sometimes control manufacturing, distribution and the retail aspects of the value chain. At each step profit is factored in raising prices and hence inflation.
This is a primary reason that food inflation has risen 17% as opposed to the overall inflation rate of 8.4% in May. It is worthwhile remembering that the general inflation rate is already exaggerated from the inordinate influence of sharp rises in electricity. Were this not so, the comparison between food and overall inflation would be even more marked.
It is really puzzling that food inflation is so high. International food commodity prices have fallen sharply in the past year, particularly amongst staples like wheat, maize, soy and chicken, according to World Bank figures. The Rand has increased markedly in strength, further reducing inflationary pressure. It is also remarkable that farm inflation, the price paid to local farmers was negative in May this year. By every right, food costs should be falling sharply. Maybe we should all buy directly from the farmers! Instead consumers are switching to cheaper alternatives in an attempt to stay within their budgets.
So where do these food price increases emanate? In short, they are stacked along the value chain we have already mapped. The packaging companies, the retailers, the manufacturers and the processors each take their cut, at every step in the chain. This is what drives up the prices that consumers are forced to pay.
It is notable that companies like Tiger Brands - recently found guilty of collusion around price fixing - remain so remarkably profitable in these supposedly tough economic times. In May, Tiger reported increased profits - after tax - of 24%, largely driven by profits on food.
It is also notable that in order to address its historical problems with the competition tribunal, it appointed the previous no. 2 of that organisation, Thulani Kunene, as its head of regulatory affairs. Corporate players will insist there is nothing sinister in such a move. In fact the present CEO of Tiger Brands, Peter Matlare, stated in an interview that putting Kunene in this position had “put what we called the right things in place.”
Matlare also made the interesting comment that a significant level of ‘selling price inflation’ drove their profit rise. This means that the company has passed on inflation to buyers. This is the nub of the issue. This is as close as we are likely to come to an admission as to how corporate profit seeking drives inflation. Tiger is but one glowing example against a backdrop of avaricious business practices.
What is clearest from these insights is that it is not only the practices, but the very system itself that needs to be fixed. Corporations have unlimited means to achieve their ends. They ruthlessly utilise these in order to continue to attract capital. The question that asks itself is how to bring the entire system of profit driven neo-liberal free enterprise to heel?
Making a profit is certainly not a crime. But is it moral or ethical to increase year-on-year earnings at double or triple the current levels of inflation? Is this not one of the most prominent, but overlooked drivers of inflation?
While inflation targeting and other blunt financial mechanisms may be unpopular amongst trades unionists and communists, it appears that these players have become so established in mainstream economics – where Blade Nzimande, Chair of the SACP is paid almost one million Rand per annum and where trades unions are now major corporate shareholders - that they can no longer see the problem, because they have become part of the problem. Perhaps it is no longer in their interests to actively seek the real drivers of inflation?
So it is not only mainstream economists who are unable to see the wood for the trees. Economists' credibility has waned since their house of cards was blown away by the winds of systemic financial collapse. We can clearly no longer trust their prognostications. Perhaps this is a good thing?
We urgently need to seek a more equitable system, or at least bring this one under democratic control. We cannot permit inflation of the most basic of human rights – food – to occur because it has become simply another commodity to be traded for extortionate profit. Neither can we permit the obsessive pursuit of profit to drive the rest of us to penury, to milk the poor and middle classes dry, while the rich prosper in an obscene pyramid scheme.
Car companies and banks that rode high on the hog of economic boom-times, now demand we bail them out of trouble. The sheer hypocrisy that ordinary people are told to put something aside for a rainy day when the entire financial system goes so far as to steal not only the raincoats, but has even laid claim to the rain itself, is staggering. Of course investment companies need our savings to prop up their broken system!
Either we must change how we do business or consign ourselves to endless exploitation by an ecologically and economically unsustainable system. The problem is not uniquely South African – we represent a microcosm of the world at large. Our 'market leaders' - the Tigers, Eskoms and Sasols - are holograms made in mould of the Exxons, Monsantos, Cargills and Lehman Brothers.
The problem - and challenge - is whether we can change the system before it ecologically and financially destroys us.
Goods and Services which consumers want are real wealth.
Wealth measured in monetary terms is only real if it is backed by such goods and services otherwise it is a fiction.
In a sense modern economies, ours included, no longer have their feet on the real earth but are solely pre-occupied with monetary wealth which may or may not be connected to real wealth of any kind. The almost inevitable consequence of this systemic disconnect between real wealth and monetary wealth is inflation as players in the monetary system do their level best to create money with no concern as to whether there is any real wealth to back it up or not. The current global financial melt down is the consequence of just such activity by American money men.
Massive monetary profits by South Africa
Greed, the Main Inflation Driver
I would like to point out to you that BEE and affirmative action are the only cause of our heightened inflation.
I would take you to thousands of companies and show you including the government departments' staff (civil servants), who are bleeding this country and no one has got the guts to say so. The day they will accept that they are incapable, that is the day that South Africa and Africa will go forward.
One needs to crawl before walking. Look at Bafana and SAA, Eskom, Transnet and I name few, the same story. We are paying for inefficiency, corruption and wastage, and the poor are the one who has to bear the brunt.
Lets put things in perspective please.