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Rising food prices pose risk for SA inflation

| Economic factors

Consumer inflation is likely to trend steadily higher this year as food prices rise, putting pressure on the central bank to increase interest rates this year, analysts say.

Predictions of rising food price pressures began in March after grain traders warned that SA could start buying grain abroad because unfavourable weather had reduced the expected 2015 harvest.

The World Food Programme weighed in on Monday with warnings of possible food shortages in southern Africa due to a severe drought in key maize producer SA, which accounts for more than 40% of regional output.

The region would likely have to supplement domestic output with increased imports, it said.

"The risks to the food inflation trajectory, associated with the maize price increase, are firmly to the upside," Investec economist Kamilla Kaplan said in a note. This was likely to be evident from the second half of the year, she added.

Food has a 14% weighting on the consumer price index, and food inflation came in at 5.9% year on year in March, outpacing the overall CPI (consumer price index) rate of 4%.

"That momentum will likely carry through going into winter, so we’ll definitely start to see a push, especially given the drought affecting maize," said Bart Stemmet, an economist at research house NKC.

"It will probably go along with price pressures from rising oil and rising electricity, so all that is going to affect the food sector from input costs to having to import maize from overseas, especially given the weaker rand."

The local currency has fallen more than 4% against the dollar this year, adding to a decline of about 10% in 2015, and the central bank has said it poses a risk to its 3%-6% inflation target.

The Reserve Bank has kept interest rates unchanged since July last year, but analysts say policy tightening is inevitable in 2015, particularly as the US Federal Reserve is also set to start hiking.

The Reserve Bank will hold its third policy meeting of the year next week.

"An interest rate rise can’t be too far off as soaring gasoline and food costs have started to take their toll," said Dennis de Jong, MD at UFX.com.

"Coupled with the domestic energy provider asking for a 25% price increase and the rand losing value against a strong dollar ... the Reserve Bank must act sooner rather than later," he said.

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