Rising inflation could become ingrained - Bifm

MBONGENI MGUNI
Staff Writer | Thursday June 23, 2011 00:00

 

The experts believe that while the rising energy prices will press firms to squeeze consumers for profit margins, the latter will also be under pressure from food, energy and commodity prices, thus demanding higher wages.

As a result, inflation could become embedded in the local economy, potentially staying higher above the Bank of Botswana's target range for longer.  The central bank expects inflation to return to the three to six percent target range by the second half of next year from current levels of 8.3 percent.

Bifm Chief Investment Officer, Stephen Mills, says inflationary pressures are already being felt from food and energy, which are largely outside the control of the local economy.  Mills says higher wage demands will become secondary effects, as workers, especially those in the low income bracket, respond to the initial effects of higher food and energy prices.

'The short-term data continues to cloud the issue, but there are growing risks of inflation becoming more ingrained as firms attempt to bolster their profit margins and employees seek higher wage rises in the face of sharply increased costs of energy and commodities,' he said in a research note released on Wednesday.

'It could get worse, and certainly the cost of some specific items might get a lot higher. Food and energy are prime examples and they are especially important to people with low incomes.'

Mills said the inflation being experienced in the local economy was of the cost-push category rather than demand-pull, which is influenced by the growing demands of a healthy economy. Cost-push, he explained, involved higher costs on businesses, resulting in them raising prices.

'In this instance, it has little to do with demand,' he said.  'Case in point: in 2008, the cost of oil and food went through the roof.  This form of inflation is difficult to control as it is not carved by internal demand, but by global factors. It is based on international commodity markets and this is what is happening to the economy right now.'The Bifm expert explained the dilemma the central bank was finding itself in with regard to using interest rates to control inflation.

'Raising rates generally slows down inflation and it is the Bank's job to keep inflation in check,' Mills said.

'But it also increases the cost of borrowing and there are concerns that this may slow down the much-needed economic recovery.  Rate rises can bring another problem with them.  They can attract foreign finance seeking better returns than are available in the 'rich world'.  That tends to push up further the currencies of developing countries, which are already worried about the impact on their competitiveness.'

Mills advised Batswana to seek investments that would protect their savings from inflation, particularly when these were for retirement.  He said the long-term target should be a return at least five percent above inflation, adding that this would not be possible with savings kept in banks.

'Inflation erodes purchasing power and retirees on fixed incomes suffer when their nest egg buys less each passing year,' he said.  'This is why financial advisers caution even retirees to keep some percentage of their assets in the stock market as a hedge against inflation.  We should choose a mix of investment instruments, so that the collective return out of our investment should beat inflation by a good margin.'

This year, inflation rose from 7.9 percent in January to 8.5 percent between February and March before declining slightly to 8.2 percent in April. Inflation was pegged at 8.3 percent in May and is set to end June even higher as the average 22 percent increase in electricity tariffs kicks in.