“Agricultural and mining producers in the primary sector of the economy cannot "pass costs increases on to consumers" as the producer prices in these industries are purely determined by the operation of the market forces of supply and demand in the local and international markets,” says Fanie Brink, an independent agricultural economist.
These industries are, in fact, “price takers” and not “price makers” of prices that are not determined on the basis of production costs plus a profit margin formula as the prices in all the industries in the secondary and tertiary sectors of the economy.
Brink referred to the article "Producer prices jump more than expected in September" posted on the website of "Businesslive" yesterday.
”How can it be said that the ‘elevated producer prices have been evident globally as demand for commodities has soared and supply chain bottlenecks continue to bedevil economies’ when almost all economists, the media and the Reserve Bank believe that the inflation rate is purely only determined by the changes in interest rates?”
What can an increase in the interest rate by the Reserve Bank do about the "global demand for commodities and "supply chain bottlenecks?" Will a higher interest rate in South Africa bring the "global demand for commodities" down and solve the "global supply chain bottlenecks?"
How can a "shift in the expectations for consumer inflation" be combatted by an "interest-rate hike" if the inflation rate is determined by the market forces of supply and demand? The most basic economic principle in economic science!
So why does the Bank continuously punishing the local consumers for price increases that they are not responsible for when prices are exclusively determined by the supply and demand in the economy?? What can an increase in interest rates do about the serious consequences that a severe drought or the restrictive quotas for crude oil production by the Arabs have on higher consumer prices in South Africa?
In 2008/09 consumers were punished with 4 percentage points increases in the interest rate when the international crude-oil price increased from US$50 to US$150 a barrel and the price of maize from US$130 to US$260 a ton which had absolutely nothing to do with the consumption of fuel and maize in South Africa at all. The Bank and many economists were very satisfied how well the higher international commodity prices responded to the higher interest rates in South Africa when the crude oil price decreased to less than US$50 a barrel and the maize price to US$130 a ton due to the international changes in the supply and demand for these commodities.
The interest rate policy of the Bank can neither have any impact on fuel prices and electricity tariffs that are controlled by the government regardless to the consumption of fuel and electricity by consumers. The same is true for many exorbitant profit margins on consumers products and services by suppliers in the wholesale and retail industries that higher interest rates can absolutely do nothing about but for which consumers are also punished with higher interest rates. The influence of higher interest rates is, in fact, negligibly small and have almost no influence on the demand of consumers for goods and services as the interest costs that consumers pay does not even feature on the list of consumers items that Statistics SA use to determine the Consumer Price Index.
It means that the claims by the Reserve Bank and other central banks in the world that higher interest rates can contain the demand of consumers is nothing else but an illusion.
Simple statistical analysis has also proven that the changes in interest rates cannot explain the changes in the inflation rate, the exchange rate or economic growth for the matter!! The inflation and exchanges rates are determined by all the local and international political and economic factors that have an influence on the supply and demand of goods and services, and the value of the currency, respectively. Economic growth is created from the supply and demand sides of the economy by the private sector that is driven by the profit motive and nothing else.
To say that the "Bank has maintained its preference for consumer price inflation to be anchored at the 4,5% midpoint of its 3% to 6% target range" when it is, in fact, determined by the supply and demand in the economy is, therefore, totally ridiculous and not true. The same is true for the latest suggestion by the governor of the Reserve Bank, Lesetja Kganyago, to move to a fix inflation target of 3%.
“I again challenge the Bank to prove its claims about its interest policy for which there is absolutely no evidence and only the single biggest delusion in economic science!!”
It is just as unfounded and a big delusion as the claims of the Federal Reserve Board in the United States that believes that its interest rate policy can stabilise prices which is totally unrealistic and achieve full employment that is determined by the supply and demand in the labour market and not by changes in interest rates!!
Brink said that “interest rate changes can never ever be a stronger force in the economy than the market forces of supply and demand! Economics 101, chapter 1, page 1.”
Fanie Brink, Independent Agricultural Economist
"Producer prices jump more than expected in September"
https://www.businesslive.co.za/bd/economy/2021-10-28-producer-prices-jump-more-than-expected-in-september/
