March’s CPI inflation rate ticked up to 7.1% year on year (y/y), or 1.0% month on month (m/m), from 7.0% y/y in February. The key driver was food price inflation, which contributed just over a third (2.4% y/y) of the annual CPI inflation rate of 7.1% y/y, leaving 4.7% y/y to be made up of all the other consumer price pressures surveyed in the economy.
Upward pressure came from domestic price pressures influencing food prices at the consumer level, notably higher domestic production costs and rand weakness over the year.
About half of the rise in domestic food prices at the consumer level, at 14.4% y/y, is due to rand weakness, the rest to rising domestic costs, particularly load-shedding and other input costs, including transport. The rand has depreciated nearly 20% y/y and with SA a price taker for most agricultural food it produces, via import or export parity pricing, the international cost of food in dollar terms substantially affects SA food prices.
This explains the juxtaposition between falling international food prices and rising domestic food costs. International food prices fell 11.7% y/y in March (Economist commodities index), but this drop was wiped out by the 18.8% upwards price pressures on food prices in SA due to the depreciation of the rand against the dollar (18.8% y/y).
Just as rand weakness against the dollar drives the cost of imported dollar-based petroleum products (petrol for example) higher, so too rand weakness against the dollar drives the price of food in SA higher as it is priced against international food prices which are dollar-based.
Agricultural producers in SA export a large quantity of food, with agricultural food priced in dollars on international markets, also known as agricultural commodities. The 11.7% y/y drop in global food prices in March means local farmers are “obtaining” fewer dollars (obviously different types of food have different costs) than a year ago. Farmers are price takers as they typically receive the price for international agricultural commodities and so don’t influence this price. Domestic food is priced against this export parity, or import parity, prices; what would be received for exporting the commodities, or the cost of importing it, such as wheat, with SA a net wheat importer.
While international food prices at the agricultural level are falling, 11.7% y/y in dollars as noted above for March (and has dropped y/y since January at an increasing pace), food sold in SA to consumers is sold in rand.
Consequently, the exchange rate matters, if agricultural food is based on dollar pricing, as food has become 18.8% more expensive than a year ago due to the rand weakening against the dollar by this amount from an exchange rate perspective.
Luckily, on their own, international food prices have fallen 11.7% y/y (nothing to do with SA), while overall this means the net effect from rand depreciation and international price movement is only a 7.1% cost increase. This is an oversimplified explanation and the figures are not entirely accurate as more items go into them. It is instead only intended to shed light on the matter of why international food prices are falling and domestic ones rising.
In SA, food prices are 14.4% higher y/y, and the remainder (14.4% y/y minus 7.1% y/y to continue the example, which is overly simplified and does not include all factors in the complex food chain process) can be understood to a degree by looking at higher agriculture input costs such as fertilisers, agri chemicals, and more, all of which have seen huge price increases over the last 12 months.
Self-generation electricity costs to meet the effect of load-shedding are an additional factor, as is loss and wastage on agricultural products requiring refrigeration or freezing. Irrigation also relies on electricity. The high cost of load-shedding, resulting in the need to procure self-generation of electricity, is evidenced by processed food prices rising by 16.2% y/y and unprocessed items at 12.6% y/y in March.
Load-shedding has placed an extreme toll on SA’s economy, and this includes substantially higher operational costs.
The agricultural process in SA is complex and passes through many stages, from production of the grain, animal or vegetable to the point of sale to the customer. Retailers themselves also having running costs in their stores such as infrastructure, labour and technology, all of which add to food prices in the CPI, with retailers themselves also having to invest in self-generation of electricity where they can. Furthermore, fuel prices — with both diesel and petrol involved in the food chain production process — have risen in the past 12 months but peaked in the second half of last year.
Food costs are expected to moderate in the middle two quarters of this year, slowing food price inflation and so aiding some moderation in the CPI inflation rate itself, with international food prices continuing to fall on base effects. However, the rand is highly volatile and further weakness would be a counterbalance to moderating inflation.
• Bishop is Investec chief economist
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