The consequences of high inflation
Earlier this week, trade union Solidarity lambasted the country’s food producers and retailers for record-high food prices. Union spokesperson Jaco Kleynhans told Sapa “Solidarity’s research shows that food prices have increased every month from January to May – and that there was a slight decrease in the cost of some products in June.” Consistent monitoring of store prices at South Africa’s top grocery chains (Spar, Shoprite Checkers and Pick ‘n Pay) confirmed further increases in July and August.
Solidarity argues that the price of consumer goods should drop through recession. While this trend quickly showed in countries like the United States, Italy and Brazil, it appeared South Africa’s food producers and retailers were converting lower input costs into profit rather than passing the savings on to final consumers. The group is lobbying the Competitions Commission to expand its investigation into pricing methodologies at the country’s main retailers. The trade union is also “planning a campaign to put pressure on food producers and supermarket groups to pass on lower input costs in the production of food to consumers,” said Kleynhans.
Where to shop
Where should consumers stop for the best ‘deal’ on a basket of foodstuffs? “Our basket currently costs R175.73 at Checkers. At Pick n Pay our basket costs R181.43 and at Spar R197.22,” said Kleynhans. These baskets demonstrate the saving a consumer can make by ‘shopping around’ between different stores. And the study also demonstrates the difficulty the Competitions Commission will have in ‘proving’ price fixing allegations where the country’s major retailers are concerned. You simply cannot allege wholesale price collusion when a basket comprising randomly selected items differs by such a margin from chain to chain. Our best guess is they will focus on certain large volume goods in their efforts to prove price fixing or price collusion.
Solidarity wants greater pricing transparency from the retailers. “You can’t, for example, sell a product for R20 while producers get R5 for the same product. They need to tell us how they get to that price,” said Kleynhans. Although we expect this call to go unheeded it won’t be too difficult for a supermarket to explain away the increase. Supermarkets have to cover substantial overheads, shrinkages, waste and return allowances before they make a cent from their trade. There’s no way a supermarket would survive if it simply hiked supplied good prices 8% across the board.
The high price versus falling inflation misnomer
Why is Solidarity so surprised by record food prices? The inevitable consequence of a lengthy dance with high inflation is higher prices. It doesn’t matter that inflation is dropping back toward the Reserve Bank’s long-term 3% to 6% inflation target. Whether food prices grow at 16.1% per annum (the level recorded in January 2009) or a mere 9.8% per annum (the level reported in June this year) the consumer will pay more.
There’s no question inflation is on a downward trend. Year-on-year inflation growth came in at 8% in May 2009 before falling to 6.9% in June. And some of the more ‘bullish’ analysts expect it to improve to 5.8% in July. Food prices have contributed enormously to inflationary pressures over the last three years. Economists say inflation would have been approximately 1.6 percentage points lower (in 2007) and 2.1 percentage points lower (in 2008) had food price inflation been stripped out. The good news is food’s contribution to total inflation has subsided to around 0.8 percentage points in the latest monthly basket, allowing Standard Bank Economics to conclude that “the magnitude of the inflationary impact of high food prices is subsiding.”
Standard Bank Economics identifies some threats to the downward inflation trend. They mention that “global inflation momentum is currently biased upwards” and that the argument for “a lower inflation trajectory [is unconvincing] in the face of cost push pressures, as companies are not discounting prices owing to financial strain.” Ordinary consumers will probably be more concerned with price hikes in their immediate environment. Top of this list is the massive increase forced through by Eskom and the National Energy Regulator SA in April. Most people we’ve talked to are stumping up between R150 and R500 extra per month on electricity alone. There’s also talk of another substantial fuel price hike in September. Oil is trading above $70 per barrel – and there are concerns the rand will give up some of its recent strengths – translating to further fuel price hikes before year end.
A mixed-bag inflation outlook
The outlook for inflation will largely guide the Reserve Bank in its decision to implement further interest rate cuts. We enjoyed the 50 basis point cut in August; but if we’re hoping for another cut in September inflation will have to continue its downward trend. Standard Bank Economics cannot provide a clear prediction: “The outlook for inflation over the medium- to long term remains decidedly mixed, despite expectations of an improvement.” Their best guess is for a slight improvement in July and August, before moderate upward pressure resumes through late 2009 and the first half of 2010. They only expect the target band to be breached in the third quarter of next year.
Will we see another interest rate cut when the Monetary Policy Committee meets in September? Our guess is incoming Reserve Bank governor, Gill Marcus, will make another cut IF the numbers support the move. So if inflation falls in July and August (and so far this looks promising) we could receive another 50 basis point interest rate cut next month. If not – we’re going to sit at the current 10.5% for quite some time.
Editor’s thoughts: The ordinary consumer can be excused for thinking the official inflation number and the price movements of the goods and services he consumes are disconnected. It’s difficult to support the 6.9% inflation argument when prices (particularly food) are growing way in excess of that. Do you believe the country’s major retailers are slow in passing savings to the consumer? Add your comments below, or send them to [email protected]
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