CPI figures expected to show moderation

Ntsakisi Maswanganyi

RISING inflation has been a challenge for both monetary policy makers and consumers since earlier this year, but there is at least a silver lining in the short term.

To rein in inflation, policy makers have had to raise rates despite sluggish growth. For consumers on the other hand, inflation has meant eroded disposable incomes.

Food prices in particular have been among the main contributing factors to rising prices. The weak rand has played a role in this, making imported commodities more expensive.

However, the pressure from food prices seems to be waning. Data shows that manufactured food inflation at producer level moderated to 8.6% year on year in June from highs of 9.5% in April.

Globally, food prices have fallen, although South Africans would most likely say otherwise as prices seem to have remained elevated.

The United Nations Food and Agriculture Organisation’s (FAO) monthly food price index hit a sixmonth low last month amid falling grain, oilseed, and dairy products prices. That was the fourth consecutive fall in the index and was mainly supported by sharp declines in the global prices of maize and wheat, amid ample supply.

If food-price increases continue to moderate globally and the rand holds up at firmer levels, local food prices could also come down going in to next year. The benefit of a drop in food prices on inflation would be immense. It means that if inflation falls back into the 3%-6% target band quicker than expected, there would be no need to raise interest rates by more than a fraction.

The South African Reserve Bank expects inflation, which is well outside the targeted range at 6.6%, to only return within the band during the second quarter of next year.

Statistics SA (Stats SA) figures on Wednesday are expected show a moderation of the consumer price index (CPI) from the 6.6% year on year in June to 6.4% year on year last month. The 6.4% was a median consensus forecast from a BDlive survey of 13 economists.

Macquarie Securities economist Elna Moolman said food prices were among the key risks not only to the inflation forecast but also to the medium-term inflation trajectory. “The drop in maize prices may pose a downside risk to the general expectations for CPI next year, despite the expectation that there could be ongoing pressure on meat prices,” she said.

Strong demand for meat globally is keeping prices elevated. The FAO’s meat price index rose 3.7 points to 204.8 last month.

Fuel prices are also helping to ease inflation, at least over this month and next year. The petrol price looks set to fall next month as the rand has played a major role in stabilising prices.

The local currency has recently been firmer amid dollar weakness. The dollar depreciated after disappointing economic-growth indicators last week.

The challenge with the rand and Brent crude oil prices is their unpredictability. They can change at any moment, particularly on global developments that tend to influence investor sentiments.

A moderation in food and fuel prices would not only be good for the inflation outlook, but also for local consumers. However, rising borrowing costs could contribute to a rise in debt levels as well as to many people defaulting on their debt repayments.

Stats SA data could show that the level of unpaid debt rose in June, reflecting the effects of an increase of 50 basis points in interest rates in January.