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Inflation will keep edging higher

Producers can’t keep absorbing costs.

JOHANNESBURG – Increases in the price of petrol and food, combined with the delayed effects of a weak rand on consumer and producer prices, pushed the annual inflation rate half a percentage point above its April mark to 6.6% in May 2014.

On average, prices increased by 0.2% between April 2014 and May 2014, Statistics SA’s Wednesday report said.

The jump was driven in large part by consumer food price inflation, which more than doubled between December 2013 and April 2014, reflecting an 8.2% year-on-year increase, according to the South African Reserve Bank.

Seven of the nine food categories in the consumer food price basket recorded price increases in excess of 6% in April, the SARB said.

Source: South African Reserve Bank

Producers will pass on price increases

The increase in the inflation rate was in line with Nedbank’s 6.5% forecast, according to Nedbank economist Isaac Matshego, who said the rise in food prices was not surprising, considering increases in the price of grain.

“Since early May, we’ve seen a decline of around 10% in the maize price and 19% in the price of wheat, which should feed into lower grain and food prices later in the year, moderating food inflation,” Matshego told Moneyweb.

However, Matshego said that inflation would remain at current levels, reaching as much as 6.8% in the latter part of the year, as producers fully passed on increasing production costs to consumers.

“To date, price pressures have been more pronounced in domestic producer price inflation than in consumer price inflation,” the SARB’s Quarterly Bulletin released Wednesday notes.

Matshego said that while production costs were driven up by higher fuel prices and wage settlements, producers had not been able to fully pass these costs on to consumers due to the weak economy and subdued demand. “Producers are unlikely to keep absorbing the increase in high production costs and this is likely to feed into higher consumer prices, which will keep consumer price inflation high,” Matshego said.

He said the Reserve Bank’s inflation forecast was in line with the current situation and therefore there would not be a major implication for monetary policy. “We could see an interest rate hike, but if we do it would be mild, probably another half a percentage point for the remainder of the year,” he commented.

Rashad Cassim, head of research at the Reserve Bank, said that South Africa had not yet seen the export supply response that should accompany the depreciation of the rand against global currencies. He said this was a function of a slowdown in global economic growth and a “number of disruptions” in our ability to export, which included, but were not limited to, the strike in the platinum sector.

Last week Friday, Fitch Ratings cut its outlook for the South African economy from stable to negative, while Standard & Poor’s downgraded the sovereign credit rating by a notch to BBB-.

Meanwhile, South Africa’s current account deficit narrowed to 4.5% in the first quarter, nearing a level last seen in the same period in 2012, as a widening trade balance was considerably offset by lower net dividend payments made to non-resident investors.

Provinces with annual inflation rates higher than headline inflation included Limpopo (7.8%), KwaZulu-Natal (7.1%) and the Eastern Cape (7%).


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