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Global food inflation prices recorded for June decreased for the first time in twelve months, according to the FAO World Food Price Index. This was driven by a reduction in cereal and vegetable oil prices, although meat and sugar prices still had an upward trajectory.
The abovementioned has not yet reflected in South African inflation data released for June with year-on-year inflation dynamics similar to the figures recorded for May. All sub-categories except for fruit again showed significant inflation in June. Month-on-month slowdowns in categories such as meat, oils and fats do, however, suggest that the rate of growth is losing momentum.
The price effect in oils and fats is still a result of the international price surge in oilseeds and vegetable oil products over the past year. The high inflationary figure is therefore a result of low base effects in 2020. The effect of this is expected to come down over the coming months.
Meat prices are also remaining firm. In the case of red meat, this is due to tight supply and high input costs, which were further amplified in June due to a shipment of live sheep and cattle to the Middle East.
Market stakeholders note that they are sensing consumer resistance to the current high red meat prices, and this could cause prices to trade sideways over the months to come. Upside risk with this expectation is, however, supported by a weaker exchange rate observed since late June and amplified by the unrests mid-July. In the case of chicken, local prices are expected to trend higher on the back of a weaker exchange rate and pressures on producer margins due to high input costs.
Looting could influence food prices
Expectations are that food inflation in July will slow compared to the second quarter of 2021 due to higher base effects that were apparent during the third quarter of 2020. The unrest, looting and infrastructure destruction incidences in July have, however, resulted in numerous manufacturing and distribution bottlenecks, which could ultimately affect short-term availability and cost of inputs. This could have knock-on effects on consumer prices and as a result food inflation, figures for July could remain firm for longer than initially expected.
Adding to the abovementioned scenarios are surges in input costs already apparent before the unrests. Elevated crude oil prices are also expected to add to inflationary pressures in manufacturing and distribution costs with Brent almost 60% higher compared to the corresponding time last year.
Animal disease issues also remain a concern. The outbreak of foot-and-mouth disease in KwaZulu-Natal as well as avian influenza outbreaks at selected layer and broiler farms, pose a huge inflationary risk if not contained. – Press release, BFAP