Food prices put pressure on rates
July 16, 2007
By Evan Pickworth
Johannesburg - Food price inflation is likely to remain above the South African Reserve Bank's inflation target band of 3-6 percent until at least the end of 2008, pressuring local interest rates and consumers' budgets, Johann Els, senior economist at Old Mutual Investment Group SA, said on Monday.
Els said he expected overall CPIX to return within the bank's target band this year, but high food prices and continued high oil prices would ensure that consumer price inflation would remain mostly in the upper half of the band through 2009.
Food inflation stems mainly from key staples like grain products, meat, fats and oils. Even the prices of milk, cheese and eggs rose 8.3 percent in May, well above the bank's upper target limit, he said.
Several factors, which include sharply higher international food prices and local supply constraints such as a smaller maize crop and shortages in milk, were responsible for this.
"Consumers in the very low and low income brackets (as defined by Stats SA) are facing general food inflation of 10.7 percent and 10.1 percent, respectively," said Els.
"These are the highest rates in several years. This means consumers who spend a large proportion of their income on food are under increasing pressure from double-digit price increases that are difficult for them to pay for."
"Our forecast is for food inflation to stay above the key 6 percent level through 2008, due again largely to the influence of international prices and local supply constraints," he said.
Els said the possibility of another hike in the repo rate when the bank's Monetary Policy Committee meets in August is "another close call", but its is likely interest rates will rise by another 50 basis points as the bank attempts to negate the risks of high wage growth and rising inflation expectations.
"Consumer demand and credit growth are both slowing, and we don't yet know the extent of the impact of the National Credit Act," he points out. "But will this be enough to offset renewed inflation risks?
"The MPC will also certainly worry about the high level of wage settlements and their impact on expectations and future inflation. The rand has been firm, but is vulnerable to adverse global developments and rising risk aversion.
“The oil price remains unpredictable, and the wild card will be how the MPC views slowing manufacturing production," Els concludes.
Food has the largest weighting in the CPIX and rising food prices have been one of the largest contributors to the recent jump in consumer inflation. - I-Net Bridge
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