Kwazulu-Natal Business News

Send  Share  RSS  Twitter  12 Sep 2011

INFLATION: Increasing Food Inflation to Continue


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Due to food inflation, food accounts for approximately 15,68% of the CPI basket of goods when calculating the monthly CPI figure. This is high in relation to the US where the food component is less than 8%, says Luke Marowitz, senior ratings analyst, Coface South Africa

In the June CPI figure of 5,1% a particularly large price increase was recorded in the ‘Oils and Fats’ sector which saw a year-on-year in rise of 23,8% and 9,8% rise in the price of ‘Meat’.

Major increases in the price of underlying products like grains and oils have been the largest contributors to increases in the CPI index, all falling under the “food” category.

South Africa was a net exporter of food until 2009 when the country was forced to seek alternative sources to meet increased domestic demand. The strengthening of the rand has helped avoid dramatic increases in food prices so far.

The Continual Rise of Food Inflation

In the medium term the westernisation of the developing world, and in particular the increase in the middle class (people earning over $6 000 a year), is expected to double to around 1,6-billion people in Brazil, Russia, India and China by the year 2020 according to Goldman Sachs. This is likely to result in higher demand for products which were previously unaffordable to people in these markets.

The demand for a higher standard of living from this market is likely to result in a strain on current supplies of certain goods including food which in turn is expected to result in increasing prices.

Future Food Inflation Seems to be Unavoidable

These elements, combined with a general increase in demand, points to higher food prices in the future, which considering the significant weighting in the calculation of CPI, could significantly increase South Africa’s CPI in the future.

The effect on businesses is a realignment of product pricing to cater for increased demand from the developing middle class. In addition the lower end of the market is expected to provide increased demand for cheaper goods as they try to balance their expenses and income and curb food inflation.

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