Lower prices good news for consumersComment on this story
Johannesburg - Two pieces of good news will be on the table when the Reserve Bank’s monetary policy committee (MPC) meets later this month.
Food and fuel prices, often powerful drivers of overall inflation, have started to slide.
Bumper crops in many parts of the world have cut the cost of South Africa’s staple food – maize.
And a 67c-a-litre reduction in the price of petrol from Wednesday should take some of the steam out of inflation.
On Friday, the Department of Energy said the cut was due to the drop in crude oil prices and rand stability.
The MPC hiked its repo rate from 5 percent to 5.5 percent in January, after the rand fell about 18 percent last year and consumer inflation threatened to breach the ceiling of its 3 percent to 6 percent target range.
But, after peaking at 6.6 percent in June, the rate retreated to 6.3 percent in July and seems to be heading back within the target range.
A moderation of inflation will be a relief to the MPC, as gross domestic product (GDP) is barely expanding.
Statistics SA said last week that GDP increased only 0.6 percent in the second quarter, after shrinking by that amount in the first quarter.
The figures are quarterly changes, adjusted for inflation and seasonal factors and multiplied by four to show an annual rate.
Finance Minister Nhlanhla Nene told Bloomberg recently that the economy might grow only 1.8 percent this year, lower than the 2.7 percent estimate at the time of the February Budget.
He cited strikes and “supply-side constraints particularly on the energy” side.
Slower growth means the government’s budget deficit – the gap between revenue and spending – could be larger than predicted, possibly triggering a ratings downgrade.
This would spell more bad news for South Africa, as foreign investors find alternative destinations for their funds.
A rise in interest rates to moderate inflation could damage the outlook further, sending the economy into recession.
Signs that inflation is subsiding will be a relief to the MPC, whose primary mandate is price stability.
Over the past two years, the weaker rand has put pressure on inflation – pressure that might now be easing off.
Investec group chief economist Annabel Bishop cited lower international maize prices and the strength in the rand since the end of January as reasons for lower food prices.
“The price inflation rate of cereals and other crops dropped from 26.7 percent in February to minus 4.8 percent currently.”
In a commentary on July producer inflation figures, Bishop’s figures showed the maize price fell 22 percent between March and July and a further 30 percent since then.
Maize futures on the SA Futures Exchange stood near R1 700 a ton on Friday.
“And this is yet to feed through fully to producer prices due to the lags involved.”
There will be a knock-on effect.
“Given that maize is a key feed component, lower rand maize prices will feed through into lower dairy, meat, egg and other animal product price inflation,” Bishop said.
“The price inflation of live animals and animal products has already dropped to 7.3 percent from 9.8 percent in April, but lags cereal price inflation by about two months.”
The UN’s Food and Agriculture Organisation (FAO) food price index fell to a six-month low of 203.9 in July, with its cereal price component 16.6 percent lower than a year earlier.
“The recent sharp slide in cereal prices reflected significant falls in international prices of maize (down 9.2 percent) and wheat (down 5.8 percent), a reaction to excellent production prospects in many major producing countries and to the anticipation of abundant exportable supplies in the 2014/15 marketing season,” the FAO said.
The US Department of Agriculture predicted the country’s maize supplies would reach a record 15 243 million bushels (387 million tons) in the 2014/15 seasons.
The US is the largest producer of maize.
At the same time, the outlook for fuel prices is also benign.
Reuters reported last week that Brent crude oil “has been unable this week to break out of the $101 to $104 a barrel range”.
And the Wall Street Journal said supplies of crude oil were plentiful and demand limited, “with oil for immediate delivery selling particularly cheap”.
It reported: “The US Energy Information Administration said US liquid fuels production, including crude oil, grew by more than 4 million barrels a day from January 2011 to July 2014, offsetting supply disruptions of around 2.8 million barrels a day.”