Inflation slows, but food prices to ‘remain higher’
A SURPRISE slowdown in consumer price inflation in May has stoked hopes for a reprieve in interest rate hikes.
But economists say consumers should brace themselves for higher food prices.
Headline consumer price inflation recorded a lower-than-expected 6.1% in May compared with 6.2% in April, beating economists’ expectations of a 6.4% hike.
Stats SA said on Wednesday that the slowdown, which is still slightly above the Reserve Bank’s 3-6% target band, was because of an unexpected drop in the prices of vegetables, fruit and meat.
Investec chief economist Annabel Bishop said the fall in aggregate demand was causing inflation to come out lower than expected.
Inflation measured month-onmonth slowed to 0.2%, compared with 0.8% in April.
Food price and nonalcoholic beverages inflation, a major contributor to overall inflation, eased to a year-on-year rate of 10.8% in May from 11.3% in April.
However, economists believe that the effects of a severe drought have not yet dissipated and food inflation, which has not yet peaked, will continue to rise.
Wandile Sihlobo, economist at the Agricultural Business Chamber, said: “We think we are closer to the peak. In the next two months or so we will continue to see [food price] increases.”
This was because of the time lag between when prices of raw commodities such as maize rise and when those increases are reflected in the shelf price.
The time lag for maize meal and samp is about six months; for milk, beef and chicken it is nine months.
However, retailers were cautious to lift prices drastically because household consumption had not shown growth, said Sihlobo.
Food prices were expected to remain at a higher level until the middle of next year.
“Any movement from there will be pretty much dependent on what goes on in the crop that will be produced in October and up until December.”
Weather forecasters are pre-Sector dicting above-normal rainfall this summer, brought on by La Niña, a weather phenomenon creating abnormally high rainfall.
“If that happens you might see raw commodity prices such as maize start to soften around March next year. They won’t soften as early as December because we’ll be sitting on tight stocks,” said Sihlobo.
The agricultural sector is expected to remain in recession throughout the year with an improvement in the fourth quarter if the rainfall improves.
Stats SA said this month that the agriculture, forestry and fishing industries had contracted for five consecutive quarters.
economic output declined by 6.5% in the first quarter of 2016 because of decreases in production of field crop and horticultural products.
Johan Pienaar, deputy executive director of Agri SA, said the extent of water availability would also impact on vegetable prices in areas where planting could be done during winter.
“The extent of this is not clear at present. I can’t see a major downward impact on food inflation in the next month or two. We may even see an increase in meat prices due to herds having been reduced due to the drought. The impact of the slack economy on purchasing power for meat products is not too clear at present.”
Economists expect food inflation to average 12% this year.
Stanlib chief economist Kevin Lings said this would push overall consumer inflation higher, above 7%, by the end of the year. The Reserve Bank expects inflation to peak at 7.3% in the fourth quarter of 2016.
Meanwhile, the slower rate of inflation in May and the firmer rand, which has been trading at stronger levels against the dollar since May 3, could persuade the Reserve Bank’s monetary policy committee to keep the repo rate at 7% next month.
The bank has raised rates by 75 basis points this year. It expects inflation to return to the target band late next year.
Colen Garrow, economist at Lefika Securities, said the outlook for the economy remained weak over the next three to four quarters. “The low growth, low inflation conundrum . . . also works in favour of a steady hold on local interest rate policy.”
Weather forecasters are predicting above-normal rainfall this summer, brought on by La Niña