Food price drop offers hope

While certainly not undoing the damage done to prices at the factory gate by surging oil prices, it does raise the interesting question whether it may be enough to halt the central bank from making another interest rate hike come August.

A hike in June is an absolute certainty given the speech by central bank governor Tito Mboweni on Wednesday evening, but there are still no guarantees further out than that.

The data the MPC will have to work with on June 12 will not include any slower pass-through of these prices, but a slower pass-through of these food prices later on could become a factor when the May CPIX data becomes available on June 25 and ahead of the August rates meeting.

"The drop in agricultural food prices will only feed through to consumer prices (and CPIX) if retailers pass on the decline in costs to consumers instead of using it to bolster margins. Manufactured food price inflation at the producer level recorded high double digits, but it lags movements in agricultural food prices," says economist from Investec, Annabel Bishop.

The reason for the drop in food prices is the stronger rand, improved production and slowing demand, which is likely to continue, notes Bishop.

Passed on to consumers?

She feels that a continued decline in agricultural food prices would cause a peak in inflation close to May's inflation rates - which is sooner than is currently being expected.

However, the key is for these benefits to be passed on to consumers.

Agricultural food price inflation was reported to have moderated 11.3% on the month due to a sharp fall in the prices of grain, vegetables, fruit, and oilseeds. Wheat prices also fell locally due to lower international prices following profit taking and improved growing conditions.

The bugbear, though, is oil - it had risen 79.4% in rand terms in April and this caused imported PPI inflation to surge to 21.2% from March's 16.2%.

Food price inflation has been the major driver of the sharp rise in CPIX inflation and this is why this measure is so important to the outlook.

Rand strength following June's rate hike, a further slowing in demand, improvement in production and retailers passing on benefits could all go a long way to raising the argument that an August hike would not become necessary.

Time will tell and if the oil price can play along and help bring imported inflation down in the month ahead - Gordon Brown is calling for a huge summit to discuss it as strikes and blockages of ports take place to protest against prices - the inflation and rates expectation picture in South Africa could start looking a lot better than it is now.

- I-Net Bridge