However, inflation pressures occur when remuneration goes up and firms just pass the higher costs on to consumers. With the relative lack of competition in our product markets, that’s typically what happens. The end result is a sustained rise in inflation, which in turn keeps nominal interest rates high and undermines competitiveness.
As long as this remuneration-price dynamic persists, our ability to lower interest rates is constrained. To see if higher wages and salaries will become an inflation problem, the South African Reserve Bank pays close attention to unit labour costs (or ULCs), defined as average cost of labour per unit of output. Since 2010, ULC growth has ranged between around 6 and 8 per cent.