Consumer inflation has hit a 10-month high on the back of rising fuel prices, according to CPI data released by STATS SA this week. CPI accelerated to 5.1% year-on-year (y/y) in July 2018 from 4.6% in June, coming in slightly higher than anticipated. Most analysts expected inflation to rise to 5% due to municipal tariff increases and base effects involving food and fuel. The fuel component of CPI showed an annual inflation of 25.3% in July 2018 from the same period last year, up from 16.3% in June 2018 as the rand slumped. Excluding fuel prices, inflation would have been 4.3% in July 2018.
The food component of CPI showed an annual inflation of 3% y/y in July 2018, slightly down from 3.1% in June 2018. Inflation on most food products within the basket generally softened due to lower agricultural commodity prices, which in turn were a reflection of available large grain-related products supplies.
July’s decline in food inflation was aided by a deceleration in the inflation rate of meat, bread and cereal. Bread and cereal price inflation has declined by 3% over the year, underpinned by the large agricultural output from both the previous and current season, which has moderated agricultural commodity prices.
Meat price inflation, which has been decelerating since October 2017 after persistent acceleration because of drought, decelerated further to 5.6% in July 2018, from 6.8% in June 2018. This further decline in the inflation rate for meat was due to lower pork prices as well as a return to normal grazing conditions in the cattle industry. The shortage of stock, which saw farmers reducing their herds during the 2015/16 drought, has now been resolved. During the drought, farmers depleted their stock which led to a shortage of stock and a sharp increase in the inflation rate of meat. The lagged effect of an improvement in grazing is that the supply of meat to abattoirs has normalised. The potential increase in beef slaughtering resulting from this normalization in the cattle industry could contain meat price inflation at fairly lower levels for some time.
The food categories that showed an upward trend include milk, eggs and cheese (which was partly due to the effects of avian influenza in egg-laying flocks) as well as vegetables. Milk, eggs and cheese inflation accelerated to 4.2% y/y in July 2018, from 3.8% in June 2018, with higher milk output helping to limit the further increase in this food product category. Milk, eggs and cheese inflation is likely to decelerate over the next few months as the anticipated egg imports from the US and Lesotho will supplement local supplies. Vegetable inflation accelerated sharply to 8.8% in July 2018, from 5.7% in June 2018. This was largely due to the negative impact of drought on production in the Western Cape.
The consensus is that food inflation should continue to remain somewhat low in the near-to-medium term. Annual food price inflation is expected to remain within the target range of between 3% and 6% this year, and is not seen as a major risk to the headline inflation outlook. This is largely driven by an adequate supply of grains over the near term, alongside moderating meat price increases. Bread and cereals prices are likely to keep food inflation slightly lower throughout the year on the back of expectations of large maize supplies of over 16-million tonnes in the 2018/19 marketing year, well above the domestic annual consumption of around 10.8 million tonnes.
Given that food has a weighting of 15.48% of overall inflation, the slight decline in the food inflation rate will have exerted marginal downward pressure on the headline inflation rate. The key risk in the medium term relates to weather conditions, with an El Niño event forecasted in most parts of South Africa towards the end of this year into early next year, which could negatively affect the new season summer crop. The recent long-range forecasts from the International Research Institute for Climate Science (IRICS) indicate a 60% chance of El Niño development by year end, rising to 70% during mid-summer of the 2018/19 crop season.
The recent deceleration of food inflation will mostly be welcomed by cash-strapped consumers. However, the acceleration of vegetable price inflation as a result of drought in the Western Cape will have a major impact on the affordability of this important food product. It is estimated that poor households spend around 11.8% of their income mainly on fruits and vegetables. Fruit and vegetable prices have lately increased to the point that poor consumers have had to remove them from their grocery lists. With recent acceleration of vegetables price inflation, affordability of this important component of the food basket, which also plays a critical role in the dietary requirements of consumers will no doubt be of great concern. This could contribute to what many analysts predict to be a “billion-dollar” obesity epidemic in South Africa, especially among poor households. According to the South Africa Demographic and Health Survey (SADHS, 2017), two-thirds of women and just under one-third of men in South Africa are already obese.
Although staples are becoming cheaper and more filling, especially when there is less money available for food and many people to feed in a given household, fruits and vegetables are now becoming luxury food items for many people. Thus, the high dependence on cheaper, filling staples, coupled with expensive unaffordable vegetables will result in an excessive intake of carbohydrate-rich foods, thus increasing the risk for obesity among low-income class.