Huge relief for cash-strapped South Africans

 ·31 Jul 2023

Financially-stretched South African consumers are likely to see some relief in the coming months, with food inflation expected to ease by the end of the year.

Inflation in South Africa has been steadily declining over the last few months, with Consumer Price Inflation (CPI) dropping from 6.3% in May to 5.4% in June.

Food inflation, which has been one of the main contributors to the high levels of inflation in the country, also dropped from 11.9% in May to 11.0% in June.

According to the Bureau of Economic Research (BER), South African food prices are likely to drop even further this year.

Last week, Stats SA said that headline producer price inflation (PPI) dropped substantially from 7.3% in May to 4.8% in June – the slowest annual increase since February 2021.

The biggest contributors to the headline reading were food, beverages, and tobacco products (jumping by 6.4% and adding 1.6% points).

That said, just like CPI, the annual rate of increase in the PPI food component dropped from 8.8% in May to 8% in June – the third month of decline.

“This also suggests that food price pressures on the consumer front are likely to ease further in coming months. This is because the PPI for final manufactured goods (headline) tends to be a good leading indicator of CPI goods prices,” the BER said.

“Further good news was that monthly inflation for intermediate PPI goods declined by a solid 1.3% after rising by 2% in May – signalling muted price pressures at the start of the supply chain.”

Divisions on where prices will go

The Nedbank Group Economic Unit said that it expects the drop in PPI to continue in July but noted that the base effects should start to taper off and prices should start ticking up by the end of the year – ending the year at 5.5%.

“Further upside risk remains as the benefits of lower global prices will be partly contained by the weaker rand. The local unit will remain under pressure as global risk appetite seesaws amid the global economic downturn and investors remain wary of SA, with the electricity shortage eroding domestic growth prospects and political rhetoric likely hardening ahead of next year’s elections,” the unit said.

Regarding food prices, the economists said that load shedding would likely still increase input costs, as companies are forced to use generators or alternative energy sources, with prices passed on to the consumer.

Moreover, it said that Russia ending the Ukraine export grain deal and the El Nino weather pattern may also pose an upside risk to fresh produce prices.

However, Wandile Sihlobo, the Chief Economist of the Agricultural Business Chamber of South Africa, said that these factors should not lead to any immediate concerns over South African food prices.

In terms of the export grain deal, Sihlboo said that there are risks to “bread and cereals” product prices as South Africa imports millions of tonnes of wheat.

However, he said there has been no notable increase in international or domestic maize or wheat prices, adding that there is a roughly three to five months delay between changes at farm and retail levels.

“Hence, I expect the prices of grain-related products in the inflation basket to maintain a softening path regardless of the recent disruption in grain prices,” he said

Despite acknowledging that El Nino will affect South Africa’s agriculture sector, he said that it should not be as harsh as the El Nino event seen in 2015/16.

“We are coming from four consecutive rainy seasons that have significantly improved soil moisture. Hence, we remain positive that the upcoming season will likely be decent, although down from the current large harvest,” he said.

Read: This is how much South Africa’s middle class spends on groceries

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