Simon Brown: I’m chatting with Thalia Petausis now – she’s from Alan Gray. Thalia, I appreciate the morning time. A great article you wrote earlier this week about food inflation came to my inbox, [titled] ‘Are we watching that 70’s show?’ Of course, the level of global inflation that we see now was the last. The issue of food inflation, in particular, you raised the issue, is it a very powerful force because it touches every single person in the worst way: we have to eat, we have to pay for food and even prices are rising.
Thalia petosis: Yes, that’s right. I think there is something else that makes it so powerful because when food becomes out of purchasing power, its effects are most felt on low-income consumers. So the inflation basket experience that low-income peers experience is much harder than the experience of high-income people. If you think of South Africa here, the basket of inflation that measures the figure SA weighs 20% per asset price – not something that affects everyone in the economy, certainly not often. You only buy or sell a home every few years, maybe you don’t even own a home.
But food inflation, as you say, is an issue that is largely at the consumer level with which everyone is often involved. I think this is why this is a very important event and a very important one in reality Political Things happening.
Simon Brown: If we add fuel to it, energy costs are even higher, I imagine the average low-income person spends proportionately much more on their salary. You make a point around its effect. You had an example where in the past food inflation, especially in emerging markets, we could start to see political instability at the same time.
Thalia petosis: Exactly. So it was actually the bread riots in Egypt that were the catalyst for the conflict, if you think of the Arab Spring of 2011. It was the catalyst pick. If we move quickly towards the current year, we are already beginning to see growing dissatisfaction, and it covers quite a wide range of emerging markets. In India this year there have been active protests among Indian labor organizations; Truck drivers protest in Spain over food and fuel prices; In Sri Lanka they are in a serious state of emergency – their crops have been destroyed, they have food shortages and civil unrest. So all of this has a food and fuel component tied together. I have, by the way, many more examples.
So it became an intense political event and resulted in riots. This has led to famine and change of government. I think this is something that everyone needs to be aware of very well.
Simon Brown: Yes. And it comes back to that key point: it hits hard and it hits the poorest.
We are in a strange situation at the moment where our inflation has come down to 5.9%. We are actually far behind. In the United States it is 8.3%, [according to] Their last print. We’re almost in a weird sense – I don’t mean to say that winning the war on inflation – is probably not losing as badly as other economies at the moment.
Thalia petosis: Yes. I would say that in the last 40 years, South Africa’s inflation has been several times lower than that of the United States, and now we are living in one of those times. My explanation for this – in fact I’ve heard a lot of explanations at the moment, I’ve heard that statistics need to better measure SA’s inflation – did we not really have the financial headroom to support consumers that the United States did. They have launched this massive infrastructure spending program. They literally held the stimulus check directly in their hands [the] Consumers
Compared to South Africa, well, we saw the social release of stress grants last year, around R350 per month. Collectively it is about R40 billion which was spent, less than 1% of GDP. The United States has spent trillions of dollars. What they’ve stimulated to do this is consumer spending, and those consumer spending comes through demand-side inflation.
If you look at South Africa’s core CPI – excluding food and fuel – in March I think we were up 3.8% a year. So it really indicates that our consumers are in a weak position.
Simon Brown: And we’ve seen an increase in rates. We got the MPC [meeting] Later today, with the expectation of half a percent. We have seen [US Fed chair Jerome] Powell did half a percent in the last meeting. You make a great point in the article: you say why people call it ‘Volkersk’ [former US Fed chair] Paul Volker returned in the eighties; In the United States, interest rates have risen to 15%, 20%, not even close. They are now at 1%. They are still at extremely low rates in an environment of high inflation.
Thalia petosis: Exactly. That’s right, it hit the nail on the head. Last time US inflation was as high as it is today, interest rates were 15% – and now they are 1%. So you can’t tell me that the central bank is doing something Brave. I think the people who made this statement are really overreacting. I now think that the Fed has raised [interest rates] By 50 basis points, it’s a small step in the right direction, a small step.
I think our Reserve Bank is acutely aware of the risks of RAND, and I anticipate that imports will have a knock-on effect on inflation if they do not increase and follow up at the moment – although they are obviously in a more complex environment because many of our consumers Weak, because our economy is not necessarily hot in all cases – far from it.
Simon Brown: Yes. One last question, bring it back to our local bond market. All this then tells us [that] Almost certainly we are going to see an increase in bond yields. That is going to be a global phenomenon. We’re not going to be immune to it.
Thalia petosis: That’s right. And in reality it has already begun to happen. Towards the end of March I think our long bonds, around the 20 year range, were trading at about 10.5% yields, somewhere. They are now above 11%. I think yesterday we liked 11.1%. So really the spillover that we’re seeing right now [is] From the Fed’s tightening cycle, from that excitement and nervousness in the international bond market to ourselves.
U.S. bonds have certainly been priced incorrectly for some time; I will probably be arguing since 2008. But as this kind of out of itself, investors will either put more money into US bonds or take money from bond funds because they are increasing yields. Unfortunately, investors are often quite responsive.
So really this is going to point to a tougher capital market, this is going to point to liquidity that the Federal Reserve is sucking from what it currently has or what has been a very cash-flush market,
… And this means that foreigners may have less money to spend on our bonds and unfortunately we rely on their participation in our bond market only because of the size of our revenue deficit.
We need them to come and help us finance our debt.
Simon Brown: That was Alan Gray’s Thalia Petausis. I really appreciate the excellent insights.