Sharp drop in food prices could be on cards

(iStock)
(iStock)

Cape Town - Higher rainfall points to a sharp fall in food prices over the course of 2017, which should alleviate pressure, especially on low-income consumers further down the line, according to Herman van Papendorp and Sanisha Packirisamy of Momentum Investments.

"Elevated food prices have eroded real wage gains for low-income consumers, while financial institutions have tightened credit lending conditions at this end of the market," said Packirisamy.

Although economic times would likely remain challenging, John Loos, household and property sector strategist at FNB, indicated that good news for lower income groups in 2017 would be an alleviation of drought conditions and a meaningful slowing in food price inflation.
 
He told Fin24 that last year the gap between high- and low-income groups widened. He thinks it was due to food expenditure being such an important factor for low-income groups.

"Reports indicate some relief from the drought, but we are not out of the woods regarding the drought yet. If, however, one looks at the lower Producer Price Index (PPI) for agriculture, one can keep in mind that it normally leads the direction of the Consumer Price Index (CPI) for food," explained Loos.

"So, we should start seeing lower food price inflation in the near term and if that comes down significantly, it could lead to some wage inflation being able to catch up."

READ: Drought is driving costs

There has been a sharp slowdown in the PPI for Agriculture, from 20.6% year-on-year in June 2016 to 6.9% by November 2016. This provides Loos with some hope that the CPI for food and non-alcoholic beverages will soon begin to see an inflation slowdown.

He expects this to be key in slowing overall CPI inflation back into the 3% to 6% target range, from an expected average of 6.3% for 2016 as a whole to 5.9% in 2017.

"This slowing in overall CPI inflation is not a major one, but is important in terms of our expectation that 2017 may not see further interest rate hiking," said Loos.

Durable goods

According to Packirisamy, consumers still seem unwilling to spend money on so-called big-ticket items like furniture, appliances and electronic goods.

The Bureau of Economic Research (BER) found, for instance, that this weak uptake of durable goods is likely due to a subdued sentiment among consumers, rising interest rates and very little credit growth. Moreover, imported durable goods have become more expensive due to sustained rand weakness.

Packirisamy pointed out that high-income earners - those earning above R14 000 per month - seem to be even more reluctant to buy durable goods.

As for low-income consumers, Van Papendorp and Packirisamy remain cautious about spending in this category.

"More clarity on the future political leadership in SA post the ANC National Executive Committee (NEC) elective conference in December 2017 and further expected interest rate cuts in 2018 should provide a more encouraging backdrop for consumer spend in the medium term," they said.

"Moreover, a bleak jobs outlook has persisted in an environment in which businesses have deferred spend on capital and labour in response to elevated political uncertainty and muted domestic demand."

Read Fin24's top stories trending on Twitter:

ZAR/USD
16.86
(+0.24)
ZAR/GBP
21.32
(+0.12)
ZAR/EUR
19.09
(+0.50)
ZAR/AUD
11.77
(+0.43)
ZAR/JPY
0.16
(+0.45)
Gold
1813.09
(+0.29)
Silver
18.99
(+1.68)
Platinum
854.00
(+0.76)
Brent Crude
43.32
(+0.49)
Palladium
1956.00
(+2.29)
All Share
56304.57
(+0.78)
Top 40
51977.42
(+0.81)
Financial 15
10307.38
(+0.31)
Industrial 25
78170.39
(+0.86)
Resource 10
53217.92
(+0.80)
All JSE data delayed by at least 15 minutes morningstar logo
Company Snapshot
Voting Booth
Please select an option Oops! Something went wrong, please try again later.
Results
I'm not really directly affected
18% - 1837 votes
I am taking a hit, but should be able to recover in the next year
23% - 2405 votes
My finances have been devastated
34% - 3576 votes
It's still too early to know what the full effect will be
25% - 2574 votes
Vote