Consumers can breathe a bit


South Africa’s headline consumer inflation slowed to a lower-than-expected 4.9% year-on-year in August 2018, from 5.1% in July 2018. Most analysts expected inflation to rise to 5.2% during August 2018. Part of the reason for the drop in headline inflation was a decline in the fuel inflation rate. Fuel inflation declined to 23.6% in August 2018, from 25.3% in July 2018. Given that fuel has a weighting of 4.58% in the CPI basket, the decline in the fuel inflation rate exerted a downward pressure on headline consumer inflation of almost -0.1% in August 2018.

The food component of the CPI registered an unexpected but slight decline in August 2018 against expectations of a marginal increase. It declined to 2.9% in August 2018, from 3% in July 2018. Ongoing subdued food inflation is likely to have contributed towards the falling inflation rate of restaurants, which declined to 6% in August 2018 from 6.5% in July 2018.

The food inflation decline in August was driven by a decline in the inflation rate of most food products within the food basket as a result of fairly lower agricultural commodity prices, mainly meat; fish; and milk, eggs and cheese products.

Meat price inflation, which has been decelerating since October 2017 following persistent acceleration due to drought over the past two seasons, decelerated slightly further to 5.3% in August 2018, from 5.6% in July 2018. This is as a result of higher beef price from the previous year, as current beef prices are stable compared to last year, although prices remain relatively high. Poultry prices are also stable due to import competition and moderately lower cost pressures as a result of relatively lower maize prices.

As expected, the inflation rate on milk, eggs and cheese decelerated to 3.7% y/y in August 2018, from 4.2% in July 2018, mainly due to low maize prices and the normalization of the egg industry. The egg industry is normalizing from the avian influenza that negatively affected egg-laying flocks late last year into early 2018.  Lower maize prices, a major input in animal feed have eased cost pressures in the milk, eggs and cheese basket.

The food categories that showed an upward trend in inflation included bread and cereals, oils and fats, fruits, vegetables and as well as sugary products. Bread and cereals price inflation accelerated to -2.2% in August 2018, from -3% in July 2018. This was on the back of the impact of exchange rates on wheat imports as well as increasing maize prices. Maize prices have increased by between 15% and 20% in August 2018, compared with the same period last year. The depreciation of the Rand against major currencies such as the US Dollar also pushed up prices for imported wheat products during August 2018.

Vegetable and fruits inflation accelerated in August 2018, largely due to the negative impact of drought on production in the Western Cape. Vegetable inflation accelerated slightly to 8.9% in August 2018, from 8.8% in July 2018. Fruits inflation, on the other hand, accelerated to -3.3% in August 2018, from -4.2% in July 2018.

There was a significant increase in the inflation rate of non-alcoholic beverages to 8.1% in August 2018, from 6.5% in July 2018. This is likely as a result of shortage of fruits that are used by the beverage industry in the production of fruit juices, largely due to the drought in the Western Cape.

The consensus is that food inflation should continue to remain somewhat low in the near-to-medium term. Food 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 prices. However, weather forecasts show a 60% chance of El Niño development by the end of this year, which remains a key risk that could potentially lead to an uptick in agricultural commodity prices and subsequently food inflation.

With a struggling economy and unemployment figures rising steadily, more consumers are out of work and the cost of living is skyrocketing. Life for many consumers is becoming significantly more difficult, as many find it hard to make ends meet on a daily basis. In many households, families have resorted to eating less than three meals a day and in worst-case scenarios, many go to bed having eaten just a single meal a day. As such, the recent minor deceleration of headline and food inflation will mostly be welcomed by cash-strapped consumers who are struggling to make ends meet. However, it is still a concern that the food most families can afford is nowhere close to the nutritious quality of food that consumers have become used to a few years ago, largely due to the relatively higher prices.

Tebogo Mashabela is an Agricultural Economist currently serving as a Research Analyst at Land Bank. He writes in his personal capacity and the views expressed in this article are his own and do not necessarily represent policy positions of Land Bank.