Food price inflation puts the brakes on rate hikes

2012-01-21 08:48

Food inflation was one of the primary factors driving inflation beyond the target band as it stands at a high of 11.6%, a factor that contributed to Reserve Bank governor Gill Marcus keeping the interest rates the same.

She said after the first Monetary Policy Committee meeting of the year that growth in consumption expenditure by households remains the main driver of growth in the economy.

“Food prices remain a major driver of inflation,” she said.

Food inflation is one of the major reasons the inflation rate is hovering perilously outside the 3%-6% target range at 6.1%. Economists warn that food inflation will continue to rise in the year ahead and that food baskets will be lighter.

Jeffery Schultz, a macro-economist at Absa Capital, said it is reasonable to expect that food inflation will continue on an “upward trajectory”. He said he expected that food price inflation could peak at a high of 15% year-on-year.

“It seems set to be one of the main drivers of domestic inflation in 2012, pushing inflation to around 6.7% further beyond the 6% mark.”

Food is a significant factor in measuring inflation and it has a weight of 14.27% on the Consumer Price Index.

In terms of demand, food is an inflexible commodity. Regardless of economic indices, people as economic actors have to eat.

South African consumers will have to be more savvy spenders in the year ahead as food inflation cannot be avoided, especially if the rand continues to weaken and the oil price continues to increase.

Rising food prices are a global phenomenon that has given rise to social and political unrest over the past few years. Several factors are driving global food prices upward.

The UN Food Price index indicates that extreme weather conditions have negatively affected agricultural production in key countries, and the weakening of the US dollar has affected the price of exported produce.

Increased consumption in the developing world driven by the swelling of the ranks of the middle class has raised demand in markets like China, Russia and Brazil. The Food and Agriculture Organisation of the United Nations said that unrest in the Middle East has an effect on trade traffic going through the Suez Canal.

Dr Thabi Leoka, head of Macro-Economic Research at Standard Bank, said: “It is possible given expected rises in oil prices in 2012 that there will be further upward pressure on food prices.”

She said that Standard Bank economists had examined food products that had shown the greatest price fluctuations over the past year and were alarmed by the 100% rise in the price of maize on the Food Price Monitor Report.

Isaac Matshego, an economist at Nedbank, said there were two primary factors driving up the price of food.

He explained that “South Africa deregulated the agricultural sector in the late 1980s, doing away with bodies like the wheat board, the maize board and others that regulated the levels of stock and prices in the sector.

They chose to track our food prices to the prices set in the US by the Chicago Board of Trade, so we have a dollar-based indicative price for food commodities.”

This makes local food prices very sensitive to the fluctuations of the rand against the dollar. A weaker rand makes imported products like wheat more expensive.

The weakening of the rand has had an effect on the price of many staples like maize and wheat which are tracked in US dollar terms. After being the 5th strongest currency in 2010, the Rand is now the worst performing currency since the start of last year against expanded majors, explains Gina Schoeman, Lead SA economist, in a recent research paper titled SA Food Inflation: Why All The Fuss.

Petrol prices and the weak rand tend to push food prices up and are likely to continue to do so, according to economists.

There is a direct relationship between the price of food and that of oil. If the oil price rises, it costs more to transport goods and thus affects their price.

When the oil price broke throught the $100-a-barrel level last year, it was clear that food prices would be affected and would also rise.

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