Too soon to celebrate the drop in inflation

Headlines trumpeted the decrease in the inflation rate last week, mostly saying that people can breathe a sigh of relief that increases in food and transport costs are eventually tapering off – but anybody doing the monthly or weekly shopping might disagree. Food in particular is still very expensive.

More than one commentator pointed out that the decline in the consumer price index (CPI) to 4.7% in July 2023 is more the result of the “base effect” of high prices in July 2022, rather than food prices easing.

Read: July inflation falls more than expected

In reality, prices increased sharply in the months leading up to July 2023 and the latest drop in inflation merely reflected this statistically.

One needs to look at the right graph – the graph of the index itself, and not the inflation rate.

Consumer price index and inflation rate

Source: Statistics SA

The CPI shows a sharp rise just before July 2022 and the past year’s average increase of 4.7% in prices comes on top of this.

Casey Delport, analyst at Anchor Capital, points out that the real decrease in fuel prices contributed to the decline in the inflation rate and that food inflation has also decreased, but that food prices still increased by just less than 10%.

“One of the key upward drivers of inflation over the previous few months, food and non-alcoholic beverages, has dropped back down to single digits, printing at 9.9% year-on-year for July versus June’s 11% year-on-year print,” says Delport, adding that the decrease in local food inflation is driven partly by base effects.

He says global food prices have decreased, but that this moderation in global food prices is taking longer to filter through to the local market as the recent depreciation of the rand offsets much of the decline.

“Looking ahead, as base effects fade out, the inflation outlook will be vulnerable to new shocks, including concerns around the El Niño weather pattern [which typically means below-average rainfall for SA] and renewed uncertainties surrounding the Russian Federation’s decision to terminate the implementation of the Black Sea Grain Initiative, which saw the withdrawal of Russian security guarantees for navigation in the North-Western part of the Black Sea,” says Delport.

Koketso Mano, senior economist at FNB, also says the fall in consumer inflation was as a result of “base effects”.

“Despite monthly inflation of 0.9%, annual headline inflation fell to 4.7% in July from 5.4% in June. Once again, this outcome mainly reflects positive base effects from last year’s elevated average price level, which led to a 7.8% peak inflation rate in July 2022,” he says.

Tatonga Rusike, Bank of America economist for Africa, also warns about the base effects of the July inflation rate.

“The good news likely ends with the July CPI print. The last three CPI prints [May to July] have benefitted from base effects – inflation peaked at 7.8% in July 2022 after experiencing steep rises from May to July 2022.

“The next couple of months will have moderate increases, but remain close to the 5% mark to year end. Near term, we think CPI prints are likely to be closer to 5% rather than 4.5%,” he says.

“August and September prints are likely to have moderate upside surprises given the weaker currency and higher international fuel prices. International oil prices averaged $75 per barrel in July and increased to $80 in August,” says Rusike.

However, he mentions in his commentary on Stats SA’s inflation report that there are a few disturbing figures when looking at food prices.

Meat prices increased by 5.1% compared to a year ago, even if the rate of decline has slowed.

Dairy, beverages, sugar, sweets and desserts, milk, eggs and cheese have all increased. “Cheese prices are rising sharply, with large annual increases recorded for cheese spread (up 19.5%), cheddar cheese (up 19%) and gouda (up 16.6%).

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“Annual inflation for hot beverages steamed to 9% in July from 8.7% in June, with the rate for instant coffee increasing from 10.3% to 11.5%. White sugar is on average 20.8% more expensive than a year ago and brown sugar 22.8% more expensive.

“Inflation for alcoholic beverages is also picking up,” says Rusike.

“The annual rate for the category increased to 7.8% in July from 6.9% in June. Annual wine inflation edged higher to 9.8% and beer saw its rate bubble up to 7.4%.”

Comparison

Moneyweb had a quick look at the full list of products that Stats SA surveys every month, comparing prices between July 2021 (before the quick increase in prices elevated the July 2022 base) and July 2023.

The increases in the prices of some products over the past two years clearly shows that the ‘good’ news of a decline in the inflation rate is not that good at all.

The Stats SA data shows that onions are more than 110% more expensive than in July 2021, hair relaxers have doubled in price, and a bottle of red wine has increased by more than 80%. The prices of a few types of fresh vegetables increased by more than 50%.

Even a visit to the bathroom costs significantly more than 24 months ago. Toilet paper and a bar of soap are more than 40% more expensive.

Ham and cheddar cheese increased by more than 30%, and instant coffee by nearly 40%.

Source: Based on Stats SA data

The Stats SA survey found that a few products have in fact decreased in price compared to two years ago.

The largest decrease of 24% was reported in the price of vinegar, while rice, pork chops, eggs and eye drops are allegedly also cheaper.

Source: Based on Stats SA data

And this is still not the end.

Economists have warned that fuel prices are expected to increase again, while the recent ban on the export of rice from India and new import duties on chicken may add new pressure to food inflation.

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