25 April 2008
column
Windhoek — For some years I have been wondering why we see an annual property inflation rate of around 20% but does not reflect in headline inflation. When headline inflation was running between 4% and 6%, property inflation was outstripping all other categories by between 10% and 15%. But over the last 6 months, we have all too clearly seen what happens when inflated assets start deflating.
What should have been apparent five years ago was hidden in a myriad of statistics and the lack of home ownership by the majority of the population, both here and in many other economies.
I am arguing that the inflation we now see manifest in the average consumer basket has always been there, or at least since end of 2001, and that it was craftily hidden by the theoretical assumptions we adopt when we design the content and weight of the phantom consumer basket.
Secondly, I am suspecting that the hidden inflation in the property market was the result of the incorrect allocation of resources, and we now have a severe correction. Capital exiting property and pushing up prices in other sectors notably fuel, gold, other commodities, and food. In other words, the reasons for the high property inflation have not disappeared, they have simply re-allocated themselves, and because the items where they pop up now, are used and utilised by many more people, they have a direct bearing on the items with the heaviest weighting in our consumer basket, hence they now get measured properly.
Let me try and explain this complicated web of inflation variables in a simpler manner.
Since about the end of 2001, inflation, if it were to be measured for property only, would nearly have touched 20% per annum. But since only a relatively small minority of the population is homeowners, and since there are seventeen different categories in which we measure inflation, property inflation was hidden by the absence of broad-based home ownership. Its effect was only felt by people who wanted to buy a first-time property and by speculators who made a killing in property over a five-year period. The way we structure our statistics made inflation invisible.
Then came the first shocks to the world's financial system in August last year when it soon became clear a huge asset bubble has been allowed to grow in the American property market. Remember that in the preceding five years, property across the globe has been pushed upward by the artificial inflation of property prices in the US market. But as the walls started crumbling in the US, the so-called sub-prime fallout, property in just about every other economy, was pulled down. The consequence was that capital vapourised in a very short period, and good money fled the property business as asset re-allocation gathered momentum. Where did the capital go? Into any other sector or industry where supply constraints, huge demand, and better prospects promised a return on capital no longer possible in property. The result is high fuel prices, high food prices and high commodity prices, all of which has a far more direct bearing on the way we measure inflation. And now, suddenly, inflation pops up, statistically, over a much wider spread of items.
I read many reports every week all singing basically the same song. Inflation is going up because of energy shortages, fuel shortages, food shortages, etc. etc. But I don't buy all of this. I have seen little explanation for the underlying reasons why all of a sudden we have all these shortages.
For instance, food shortages. It is widely stated that the move to bio-fuel is pushing up cereals, which in turn is used in the production of protein, thus all the shortages and the rise in prices. I say rubbish. Only a few years ago, we were lamenting that European and American subsidies are creating such an overproduction of food, that is was thrown away, or recycled as compost, by the millions of tonnes. In my view the problem lies on the production side, but only in the lack of profits. Subsidies became necessary to keep farmers on the ground in what many governments view as a strategic activity. Farmers never saw the profits otherwise every farmer would have been driving a Merc. But when bio-fuel proved to be more profitable, capital started chasing the industry, and we have food shortages.
The same with fuel shortages. It is a common fact in the industry that it is simple to produce more oil. But the world's oil market is carefully controlled, capital is looking for return on investment, and again, suddenly, there is not enough oil. Meanwhile oil producing nations and oil companies are reaping unprecedented profits.
My views on inflation have developed over many years, but adjustments to the February and March inflation figures in South Africa, released this week, showed that we have moved into double digit inflation more than a month ago. That caught my attention and compelled me to try and demonstrate how skewed our methods and our morals are.
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