The most obvious effect of inflation is its ability to erode the purchasing power of consumers. This means that each unit of currency in the economy will be able to purchase fewer goods and services over time. Poor households are set for some reprieve from the spending squeeze as food inflation fell further in February.
The recent easing of food products inflation will come as a relief to a majority of consumers who spend most of their income on food. This is particularly true for poor households that spend almost one-third of their income on food. According to Stats SA, poor households spend 33.9% of their income mainly on starch or breads and cereals, followed by meat and fish (24.5%), fruits and vegetables (11.8%) and milk, cheese and eggs (8.1%). Although still at higher levels, consumers will welcome the recent easing of meat inflation, as this will give them greater purchasing power. Regarding eggs, however, inflation remains a concern as most poor households cannot afford them as a relatively cheaper source of protein.
Both headline consumer inflation and food inflation eased by more than expected in February 2018, largely due to falling agricultural commodity and fuel prices. Headline inflation fell to 4% year-on-year (y/y) in February, from 4.4% y/y in January 2018. The better-than expected headline inflation numbers may provide an opportunity for the Reserve Bank’s Monetary Policy Committee to seriously consider cutting interest rates when it meets from the 26th – 28th March 2018.
Food and non-alcoholic beverages inflation has been decelerating over the past couple of months. It fell to 3.9% y/y in February 2018, from 4.5% y/y in January, largely due to a widespread decline in agricultural commodity prices as a result of higher agricultural output in the previous production season. This is the lowest level recorded since December 2013, when food products inflation was 3.4%.
While the inflation rate in a majority of food and beverage products across categories has slowed further from January levels, there are exceptions. The price inflation of processed food; fish; milk, eggs and cheese; sugar, sweets and desserts all increased in February, relative to their January prices.
Although meat products price inflation continues to decelerate, easing to 11.4% y/y in February, from 13.4% y/y in January, it remains a key driver of the food inflation basket with a weight contribution of almost a third of the total food basket, and is the only food product at double digits inflation rate. The meat industry (beef to be specific) is still recovering from the worst drought in history that saw farmers culling their animals as a cost containment strategy, and as such, it is still rebuilding cattle herds. It is worth noting that the rebuilding of cattle herds normally takes anything between two and five years.
Persistently high meat inflation means that the cattle restocking process is proving to be slower than expected, and this is supported by the slow slaughtering activity during January 2018. After showing a 10.2% month-on-month (m/m) increase in December 2017 as a result of seasonal higher demand during the festive period, the cattle slaughtering activity declined substantially by 28.2% m/m in January 2018, with 188 737 head of cattle slaughtered in January, according to data from the Red Meat Levy Administration. However, the recent rainfalls in some parts of the country will help in the rebuilding of herds as grazing grass becomes available.
Milk, eggs and cheese products price inflation, on the other hand, increased by 4.8% y/y in February 2018, compared to 4.2% y/y in the previous month as a result of eggs shortages. Egg prices have seen a sustained upward trend supported by stable demand and shortages due to the outbreak of the avian influenza in July 2017.According to data from the South African Poultry Association (SAPA), approximately 4.6 million birds have been culled since the outbreak of the avian flu in June 2017, a majority of which were egg layers. This had a knock-on effect on the availability of eggs and poultry meat for consumers in the country, including neighbouring countries.
The consensus is that food inflation should continue to ease in the coming months. This will be influenced by relatively large grain stocks from the previous season, expectations of a good harvest in the summer crop growing areas of the country, and the expected normalisation in livestock slaughtering which could contain food inflation at fairly lower levels in the coming months.
However, the sugar tax that is to be implemented in April 2018 is likely to have an impact on food inflation. It is expected that the sugar tax will increase food price inflation and headline inflation by 0.6 and 0.1 percentage points, respectively in the year. In addition, the continued dryness in the western parts of the country might have an impact on inflation in the near future. According to the South African Reserve Bank Monetary Policy Committee, food price inflation is expected to average at 5.2% in 2018. However, the increase of the value added tax (VAT) from 14% to 15% announced in the budget speech earlier in February 2018 poses a risk to the overall inflation outlook.
Tebogo Mashabela is an Agricultural Economist at Land Bank. He writes in his personal capacity.