SA on track for moderate food-price inflation

As winter cereal planting gets under way, early indications are that SA is on track for moderate food-price inflation and strong agricultural exports.

The relief provided to consumers recently through falling food prices has been put at risk by the drought in the Western Cape, a weakening rand, rising fuel costs and the prospect of a global trade war. But analysts said consumers and farmers had reasons to be optimistic.

In March, SA recorded the lowest inflation rate since February 2011 at 3.8%, mostly due to lower prices of food, though this is expected to be at the bottom of the current cycle.

May is the start of the winter planting season, with indications that Western Cape farmers were betting on the forecasts of improved rainfall, said Wandile Sihlobo, an agricultural economist and head of agribusiness research at the Agricultural Business Chamber.

Early indications were that wheat planting would increase 2% in 2018, driven largely by increased planting in other provinces. Maize planting was expected to rise 5%, and canola 7%, said Sihlobo.

Maize production in 2018 was expected to be about 12.8-million tonnes. Although that was less than in 2017, SA still had significant overstocks from that year’s record harvest. The higher maize price had put pressure on Western Cape livestock producers who had to pay more for animal feed as trucks transporting maize from inland were returning empty from the coast.

Because of this, farmers in that province were likely to shift to feed crops such as canola and barley, at the expense of wheat, said Absa AgriBusiness economists. SA is a net importer of wheat, with a bumper crop expected globally, and expectations that the US would increase cattle slaughtering was reason to be optimistic about meat prices, said Sihlobo.

Local yellow maize prices have come off their yearly low, but remain subdued relative to previous years. On Friday the yellow maize contract price rose 1.1% to R2,199 a tonne, having climbed 13.7% in 2018.

Maize prices picked up slightly in March, when China slapped a 25% tariff on US maize and soybeans, a retaliatory measure after the US imposed new steel and aluminium tariffs.







Tariffs continue to increase above inflation rate

The businesses and the residents of Cape Town will be paying a high price for the drought and the lack of preparation for it by the City Council, says the Cape Chamber of Commerce and Industry.

“The first thing we noticed in the Mayor’s budget speech was the 26.9% increase in water and sanitation tariffs,” said Ms Janine Myburgh, President of the Chamber.

“This comes after a decade of water tariff increases well above the inflation rate, and in some cases double the CPI.”

She said the Mayor’s speech was short on detail but it was clear that more than R1.4 billion would be spent on developing aquifers and upgrading treatment plants to recycle more water.

“This is a good thing. We have been calling for greater reuse of water for years but little was done and now we are paying for it,” Ms Myburgh said. “A lot of this work should have been done and financed by the steep increases in water tariffs we have seen over the last decade.”

The upgrading of water treatment works will cost more than R720m and that includes R500 m for the Zanvliet water re-use plant.

Property rates will go up by 7.2%, electricity by 8.1% and refuse tariffs by 5.7%.

Ms Myburgh said the tariff increases were obviously averages and we had yet to see how they would be applied in the block system which usually meant the more water one used the more expensive it became. “There could be some big shocks for large water users.”

She said the Council could expect to sell a lot less water next year, even if we had good rains. Businesses and people have made big investments in water-saving equipment, grey water systems, boreholes and especially rain water tanks. “It will be just like electricity. The more expensive water becomes the more worthwhile it will be to exploit alternative water sources and the Council will lose out.”

The speech made no mention of any Council plans to reduce costs or economise on operating costs.


Beating inflation - an essential investment goal

Inflation can have a significant impact on your savings and investments. By its very nature, it diminishes the value of your money and reduces your buying power over time. This is why it is critical to add inflation-beating to your investment goals, or you will find yourself in a position where your money is not worth as much as you had hoped for when you need to access it.

Factoring inflationary erosion on your investments is essential regardless of your life stage.

During your working years, the impact of inflation is less noticeable as your income is roughly adjusted by inflationary increases each year.

For those in the ‘accumulating phase’, inflation-beating returns will ensure that your wealth grows in real terms and will have spending power in the future. A simple way to think about this is that if you had R100 today and kept it under your mattress, that same R100 would have lost half its value in 13 years’ time (assuming a constant inflation rate of 5.5% p.a.).

The same principle applies to retirement savings. At retirement, your focus should be on keeping up with inflation when you are drawing an income. You need to carefully consider inflationary increases and the effect it has on your income and retirement nest egg. By the time you reach retirement, it is already too late to start thinking seriously about inflation and there is very little you can do to buffer the effects on your money.

While you may have been less aware of inflation during your working years, your retirement savings should in the very least, keep up with inflation. This approach ensures that your retirement nest egg would be sufficient to sustain your post-retirement lifestyle.

Understanding the impact of inflation on your investments

One of my university professors defined inflation as “too much money chasing too few goods”. For a long time, I just imagined everyone earning more and more money, but being forced to pay more for the same goods. This led to further questions: why is everyone being forced to pay more? Why are the number of goods staying the same? How do I get to this place where everyone is earning more and more? Surely this explanation was too simplistic?

Fast forward a few years and I now think about inflation basically on a daily basis. For the most part I think about how we should construct portfolios that can beat inflation without taking on too much unnecessary risk. But why not just aim for a positive return, why add the complication of beating inflation on top of that?

The answer lies in the reason for investing. We invest as a method of saving and to grow our wealth. The balance between saving and growing wealth may speak to the risk profile of each individual investor. The more savings-focused you are, the more risk averse you may be as an investor. In contrast, the more growth focused you are the more inclined you would be to take on risk. Regardless of where you find yourself on this spectrum, in order to save and grow your wealth, you simply must beat inflation over time.

The impact of inflation on the price of goods

Taking the concept of inflation one step further, let’s consider the value of money and the price of goods. We think of money as rands and cents, but money enables us to buy an assortment of goods. The price of these goods increases over time.

During your working years, it is unlikely that your salary will decrease. Essentially, you will earn more which means that you are more able to afford to buy the goods that you need or want. This increased spending capacity coupled with the increase in the factors of production, forces the price of goods to increase.

In a growing economy there may be scope for an increase in production which could bring more goods to market, however, in a growing economy wages are likely to increase more as well, further fuelling the competition to purchase these goods.

We inevitably get into a cycle of increasing prices of goods. This may sound concerning, but the South African Reserve Bank is geared towards keeping inflation within the target band of 3% - 6%. A manageable amount of inflation within an economy is usually a positive sign of growth and prosperity.

Price increases are almost unavoidable. Therefore, when we invest we ultimately want to be in a position in the future where we can buy more goods then, than what we can by now as a result of the growth of our investment. This growth needs to be more than inflation to ensure that this will be the case.

So not only does my Economics 101 professor’s explanation say what inflation is, it also shows how it comes about. We are in effect forced to pay higher prices, as we negotiate our wages higher and even if the production of goods increases, we will be able to pay more for these goods. After nearly 20 years I’ve realised that his explanation – too much money chasing too few goods – wasn’t too simplistic after all.

  • Use the PPS Investments inflation calculator to get an idea of the impact that inflation has on your buying power over time.  Follow this link to visit the calculator


Inflation wipes out wage rises

The latest data has shown that average opportunities real term wage increases for 2017 are as flat as they were in 2016. If you’re hoping that your Rand will go just a little bit further as we move fast through 2017, the latest research shows you should probably think again.


Steady rates, no surprise

The Reserve Bank’s decision to leave its repo rate unchanged at 7% per annum at the conclusion of its monetary policy meeting today is no surprise.

Inflation has improved

The inflation outlook has improved with inflation expected to peak lower (6,7% in 4Q16) and to return to below 6% earlier (2Q17) than previously forecast and final domestic demand, especially private sector fixed investment, is very weak. The currency has also appreciated through the year, which helps to anchor the inflation outlook. Meanwhile, inflation expectations, an important consideration for the Bank, appear to be reasonably well anchored even though at the top end of the Bank’s inflation target range of 3% to 6%.

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