January inflation figures, which will be released next month, could see inflation close to 8% — and expectations are that it will return within the target range by the middle of the year.
Calls are mounting for Reserve Bank Governor Tito Mboweni to loosen his monetary grip and cut rates aggressively. Standard Chartered economist Razia Khan is expecting a 100bps rate cut next week, followed by a further 100bps in April. The money market is pricing in a total 400bps cut this year, although economists believe this figure will be 350bps, bringing the prime lending rate to 11,5%.
This week December inflation figures came in below expectations at 10,3%, compared with November’s figure of 12,1%. January’s inflation figures will reflect the new weightings of the consumer basket and economists expect this to shed about 2% off the inflation figure. Even without this reweighting effect inflation has started to decline faster than expected.
But food inflation remains a concern and there has been a hot debate recently as to why agricultural prices, which are now recording negative growth, have failed to feed through into shelf prices. Inflation figures, excluding food prices, would have clocked in at under 8%. This week Pick n Pay Stores chief executive Nick Badminton requested a meeting with suppliers to discuss why they have put through requests for price increases on certain items.
“There is a customer expectation of price reductions, driven by the lower fuel price in particular, and we have already this year had multiple requests from suppliers for price rises. We need to satisfy ourselves that these price rises are justified based on measurable increases in supplier costs,” says Badminton, adding that there are products that went up last year because of higher fuel prices but which are yet to see a drop in prices, particularly those that are direct derivatives of oil.
“We are actively putting pressure on these suppliers to understand why this would be the case. In some instances there will be compensating cost increases, in others there may not be.” Some food price increases are justified, such as potatoes, which have been hit by weather conditions, and tinned foods, which have faced a significant increase in the price of tin plate. It would seem that Pick n Pay is experiencing pressure from consumers and would like suppliers to explain exactly why the grocery bills are not being reduced.
But Pick n Pay has reported price decreases, such as a 40% fall in cooking oil and a 17% fall in the price of flour in the past six months. The price of frozen poultry, UHT milk, cheese and plastic bags are back to levels seen in January 2008. Milk, cheese and eggs make up 9% of the food inflation basket. Critically for the lower end of the market the price of paraffin has fallen 66% compared with a year ago. These price reductions had a moderating effect on food prices, with the price increasing 0,7% for the month, which Stanlib economist Kevin Lings says was below his expectations.
Lings says that food inflation is now down at 16,8% year on year compared with a peak of 19,2% in August, although it is proving to be relatively sticky on the upside, considering that agricultural inflation is in deflation. Vegetables, which make up 10% of the food basket, have increased in price. Grain and meat, which make up 18% and 27% respectively, have eased off only marginally.
Analysts say that the lag in shelf prices to reflect the agricultural prices is mostly because of suppliers attempting to regain their margins, which were severely squeezed last year after they were unable to pass on the full cost increases to consumers. Lings says international food prices have fallen noticeably in the past few months, but the full benefit of this is mitigated by the sharp fall in the exchange rate and the desire by South African food producers to recoup operating margins that were lost when agricultural prices initially started to escalate, although Badminton says that no supplier has offered this as a reason for price increases.
Lings believes that there has been a period of margin recovery, but that margins have been restored and that the benefits of lower agricultural prices will start to show in shelf prices. This will add further momentum to the downward spiral of inflation and add further strength to the call to cut rates.
This week the Reserve Bank’s leading growth indicator showed a record 13,9% decline, suggesting a sharp fall in economic growth in the next six to 12 months. Standard Chartered’s Khan says that, given the global situation and worsening domestic figures, the outlook for inflation is now benign. Standard Chartered is expecting a 100bps cut next week, followed by a further 100bps in April and a more moderate 50bps cut in the following two meetings. Mark Appleton, chief investment officer at BJM Private Clients, says there is a reasonable chance that the repo rate will be cut by 100bps. This has been factored into the money markets.
Although inflation is predicted to be within target range by mid-year, it is expected that it will tick up again in 2010 to about 7%. Lings says the combination of higher electricity prices, a low base effect and increased prices during the World Cup will add inflationary pressures. Lings says that interest rate cuts will be limited to 350bps this year and that rates will be held stable, with the risk of a rate hike in 2010. But the sharp drop in inflation will give the Reserve Bank a window of opportunity to cut rates rapidly. Mboweni will be able to save face and be seen to be sticking to his inflation-targeting mandate while cutting rates more rapidly to shore up the economy.
Inflation hits poor hardest
Although on average it appears inflation has been beaten back for 2009, because of lower oil prices it remains high, especially among the poor.
The inflation rate for low-income earners is just short of 16% and for middle-income earners it remains above 12%.
Among emerging markets South Africa has the seventh-highest level of inflation and 14 out of 18 components of the CPIX basket are above the target range.
Simon Pearce of Marriot Income Specialists says that inflation remains a significant threat to retirees who rely on interest income. Income yields from both cash and bonds are well below the inflation rate.