JANNIE ROSSOUW: Beware of queflation

Inflation is always a danger, with consumers suffering due to price increases amid high inflation. Authorities should therefore always guard against inflation.

Many developed countries now suffer inflation because the authorities in those countries were asleep at the wheel. Decisionmakers were simply not diligent enough when price levels started increasing.

When inflation started accelerating in those economies the authorities described it as transitory. The view was that the price increases would be temporary; would not develop into a long-term trend. Inflation was expected to disappear like magic, without any policy action.

This view was wrong, as inflation is never transitory. Due to this mistaken view, central banks in many developed economies fell behind the curve in tightening monetary policy. There was no magic disappearance.

It is exemplary that the SA Reserve Bank did not make the same mistake. The country’s central bank acted diligently and timely. In years to come SA consumers will reap the benefit of this foresight.

Inflation is always a danger as inflation expectations change rapidly for the worse amid sustained general price increases. This is what happened in developed economies. Those countries now battle to contain consumer expectations of sustained future inflation.

Consumers act in accordance with their expectations. If higher prices are expected in future, consumers increase demand to avoid expected future price increases. Similarly, under conditions of deflation, with declining general price levels, consumers expect lower prices in future. Rational behaviour under such conditions is to postpone demand to reap the benefits of lower prices in future.

False sense

The proper policy response under conditions of accelerating inflation is tighter monetary policy and higher interest rates. However, though consumers dislike inflation, those with debt repayment obligations also dislike higher interest rates. Higher rates are only welcomed by consumers who have savings and therefore earn a better return when rates increase.

Authorities often try to find a solution to price increases without reverting to stricter monetary policy and higher rates. One temptation is the introduction of price controls, which give authorities a false sense of assurance that they have done something to contain prices.

However, the downside of price controls is rationing and shortages. Consumers simply cannot find stocks of goods subject to price controls when prices are kept at an artificially low level. The lower price means nothing as there is nothing to buy at that price. The result is often smuggling and parallel markets, with goods changing hands at illegal higher prices.

Many countries have tried price controls and other forms of rationing, often during war. Under these conditions consumers queue in the hope of purchasing some of the limited available supply. Many consumers at the back of the queue must leave empty-handed after the supply runs out.

Under conditions of price controls and rationing price increases are limited, and the rate of inflation is lower. The authorities have therefore succeeded in their initial immediate objective, to contain price increases, but the price pressures have not actually abated.

After election

As this type of inflation has no general description, I call it queueflation. Demand pressures are visible in the length of queues, rather than in the published rate of inflation. While the rate of inflation is published, the length of queues is not measured and reported. The inflationary problem is not addressed; it is merely suppressed.

Governments are often tempted to introduce price controls with concomitant queueflation when the rate of inflation stays high or accelerates before general elections. At least it will seem that price increases are lower than before, with the economic consequences following only after the election.

Consumers should beware of queueflation when inflation pressure continues and authorities are desperate for any form of action to improve the perceptions of the public about rising prices. Price controls and rationing are not solutions, they are merely knee-jerk reactions with no sustained benefits.

• Rossouw is a visiting professor at Wits Business School.