Electricity prices pose major inflation threat

2 December 2009

The scale of South Africa's impending electricity tariff increases are the biggest single threat to the country's inflation outlook.

Eskom's price increases have already added 91 percent to the cost of electricity since 2005, compared with overall cumulative inflation of 35 percent over the period, according to Mike Schussler, the chief executive at Economists.co.za.

"Over the last two years inflation was at least 1.5 percentage points higher than it would otherwise have been, due to the direct and indirect impact of electricity increases," said Schussler.

Most of the damage came in recent years. "In 2005/06 the price increase was only 4.2 percent, followed by a hike of 6.8 percent the following year," he said.

However, rising energy costs and the need to refurbish existing plants and expand capacity created a financial crisis, starting in 2007. That year the price was hiked by 27.5 percent, followed by a 31.3 increase last year. Eskom will ask for a 35 percent increase for 2010/11.

Schussler estimated that the cumulative impact on electricity tariffs since 2005 would rise to 158 percent by the end of next year.

The direct effect is limited by electricity's small weighting in the consumer price index (CPI) at 1.87 percent, down from 2.97 percent in the CPI basket before it was reweighted at the start of the year.

However, the indirect impact is substantial because electricity is used in nearly all production processes.

Christelle Grobler, an economist at the Bureau for Economic Research at Stellenbosch University, has compared inflation projections over the next three years based on tariff increases of 31 percent and 35 percent.

She found the smaller hike produced inflation of 5.7 percent, 5.4 percent and 5.5 percent, while with the bigger hike inflation was 5.8 percent, 5.6 percent and 5.8 percent.

"But that was measuring only the direct impact," she said. "The indirect impact could be as much again."

John Purchase, chief executive of the Agricultural Business Chamber, said Eskom's revised price hikes would have a "huge impact" on food prices in South Africa.

Original Article Link:

http://www.busrep.co.za/index.php?fArticleId=5270250