When politics drive inflation - a headache for the Reserve Bank

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Things are going to get a lot worse before they get better, with load shedding destroying the economy and driving inflation in SA.
Things are going to get a lot worse before they get better, with load shedding destroying the economy and driving inflation in SA.
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Annual consumer inflation (CPI) slowed to its lowest level in nearly 12 months, falling to 6.8% in April from 7.1% in March.

CPI rose to 7% in July last year after the war in Ukraine caused blockages in global supply chains and drove up global inflation forcing the Reserve bank’s monetary policy committee (MPC) to hike rates by 4.5% since its November 2021 meeting.

Food inflation eased marginally to 13.9% year-on-year in April from 14% in March. Food inflation has driven CPI in the past few months with bread & cereals prices shooting up 20.8% in the 12 months to April, lower than the January peak of 21.8% according to Statistics South Africa which released this month’s data on Wednesday.

Prices of milk, eggs & cheese saw the largest increase in 14 years rising to 14.5%. The average price of a 2-litre carton of fresh full-cream milk increased from R30.14 to R35.88 in the 12 months to April

"Over the same period, the average price of a kilogram of cheddar cheese climbed from R118.24 to R135.11 and a tray of six eggs from R20.38 to R21.59,” the stats agency found.

It added that on average vegetable prices reached a 15 year high after rising by 23.1% year-on-year in April. 

“Products pushing up vegetable prices include onions (up 52.8%), carrots (up 29.8%), peppers (up 25%) and potatoes (up 24.4%),” StatsSA said.

A cup of coffee is now much more expensive after ground coffee or coffee beans were up nearly 18% in April. Instant coffee was up by almost 15% while fruit juices increased by 19.2% driving the non-alcoholic beverages index up to its highest level in 13 years to 10.4%.  

READ: Families at risk of hunger as surging food prices drive inflation to 7.1%

Food prices - win some, lose some

Tertia Jacobs, Investec’s treasury economist says higher food prices were a result of increased input costs mainly because of load shedding and expensive imports because of the weaker rand. However, food prices are expected to start tapering down in the second half of 2023.

“We do think over the next two months or so that food price inflation will peak because internationally wheat and maize prices have started coming down. But there is usually a lag as new inventories come in that should start curtailing food prices going forward.”

Food price increases
Food prices increases

But prices of traditional cheap protein options like chicken have increased with chicken prices up 11% year-on-year in March, and likely to go up also because of load shedding. This week the country's largest poultry producer Astral released its annual results which showed that load shedding was not only eating into the company’s profits but would see consumers pay even more for chicken. The company lamented lack of proper infrastructure like water treatment and availability as increasing their input costs. 

In an interview Astral CEO Chris Schutte said the company had spend R1.2bn to mitigate the impact of load shedding and lack of proper infrastructure especially water and other municipal infrastructure services. 

This remains a big concern and the bigger concern is that there doesn't seem like there are plans from SOEs or government to improve the situation. There's a lot of talk and some plans but absolutely no execution of those plans. We are currently subsidizing our customers by more than R3 a kilo of chicken that we absorb and hence a negative paltry margin of 4.4%. So, the actual driver of food inflation is not the producer, its the additional costs that we have to absorb due to the weak state of our infrastructure

Rand's weakness still cause for concern

Lower profits for companies spell bad news for the country’s revenue collection and National Treasury’s ability to extend social transfers to needy South Africans including the much-needed R350 grant which has been budgeted until February 2024.

Despite the latest decline in CPI the outlook to inflation remains tilted to the upside with the effects of the weak currency still to be felt in the next quarters. The ZAR weakened to a new level above R19 to the USD because of mainly politics.

The ZAR underperformed against major global currencies and countered the decline in the price of Brent Crude oil which dropped to around $76 a barrel. As a result, South Africans could not enjoy the full benefit of the drop in the oil price at the beginning of May as smaller fuel price drops filtered through and the expected fuel price drop at the beginning of June is likely to be smaller as well on the back of the weak and volatile currency.

Jacobs explains: “What also becomes very important is, is the weaker rand going to stay at this R19 level or will come back to R18.50 to the USD.

Its very important where this rand is going to settle whether we’re going to get statements from the government that will boost confidence because right now there is nothing that inspires confidence the country risk premium has actually increased

She added that the deceleration in CPI forecast in the second half of the year will be slowed by load shedding which is inflationary coupled with the weaker rand. The central bank estimates that load-shedding will add 0.5 percentage points to headline inflation in 2023.   

It is specific factors that are driving the weaker rand for example the concern about the intensity of load shedding to stage 8 during the winter season some people are worried about a blackout. And of course, the US-SA diplomatic fallout, all of this is really weighing on confidence and that’s a big driver of the weaker rand

 Jacobs said.

Political will needed to fix issues

She pointed out that monetary policy cannot fix the issues that are driving the rand weaker it is the political will from government to address pressing issues in the country.

“The electricity issues more expediently, the rail and logistics crisis, what’s happening at municipal level, the cholera outbreak in Hammanskraal that cannot be fixed by monetary policy. It’s a big dilemma for the central bank.”

Adding to the high inflation this year will be the expected increase in electricity tariffs in July when municipalities will increase their tariffs by more than 18%, bringing consumers’ disposable income under pressure.

READ: Nersa greenlights 18.65% electricity tariff hike amid load shedding woes

“The challenge for the Reserve Bank is that they cannot just stand on the sidelines when inflation accelerates. The longer inflation stays high the more entrenched inflation expectations become. We’ve seen the demand for wage increases coming above inflation and that in turn will exert more pressure on companies input costs and before we know it we’ll be in this price spiral again,” Jacobs stated.

The MPC which started its meeting to decide on rates on Tuesday is expected to announce an interest rate hike on Tuesday of another 25-50bps, bringing the repo rate to 8.00-8.25% according to FNB senior economist Koketso Mano.

She said: “A continuation of the hiking cycle would showcase the MPC’s efforts to uphold their credibility in guiding inflation to target, especially in a time when global inflation remains elevated. It will also show their aim at avoiding under-tightening, which would be harder to reverse and have more adverse implications for the economy when inflation expectations remain elevated, and policy needs to be much tighter than the current trajectory.”

“The impact on aggregate demand is likely to be mired by the ongoing investment into alternative sources of energy,” she added.

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Stats SA's recent consumer price index data this week indicated the rise in food prices was the largest in 14 years. Economists say continued load shedding also adds to the rise in the cost of food production. How are you feeding your family during this tough time?
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