Food inflation is expected to moderate significantly in 2024 compared to last year, bringing some relief for South African consumers.
Investec chief economist Annabel Bishop said inflation in South Africa dropped to 5.1% in December.
However, before it gets better, inflation is expected to rise again in January 2024 to around 5.5% as inflation outcomes remain choppy.
“Nevertheless, food price disinflation is expected to alleviate some of the pressure on inflation for the year,” she said.
This is partly because food prices have been moderating internationally and have been falling year-on-year since the start of 2023.
Food price inflation in South Africa moderated to a still high 8.5% in December after coming out at 9.0% in November.
However, January saw international food prices fall by 3.3% month-on-month, according to the Economist Agricultural Food Commodities Index.
Bishop explained that international commodities prices are US dollar-based.
This means the ZAR/USD exchange rate has a key effect on imported commodities such as oil and petroleum. In turn, this influences the price of agricultural goods in South Africa.
The country’s agricultural goods are priced on the prevailing global commodity prices – in US dollars – and then converted into rands due to import and export price parity.
Therefore, while global food prices fell significantly on the month, the rand weakened by 0.9% month-on-month against the US dollar, which will shave off some of the moderation but not the bulk of it.
Bishop also said global food prices will see further declines this year on an annual basis.
She explained that even without any increase in the CPI on the month – and a petrol price decrease – inflation will still rise in January due to strong base effects.
A number of other prices surveyed besides fuel and food will add upward pressure.
However, it is still forecast that CPI inflation will reach 4.5% around the middle of this year and even dip below this in the second half of 2024.
Inflation is expected to then move back and average around 4.2% in 2025.
Additionally, South Africa’s food price inflation is likely to see further moderation, dropping to around 7.0% in January on both suppressive international drivers and a high base.
Bishop said wheat, maize and soybean prices have been falling this month versus December, with some good harvests and an expected weakening in demand having an impact on these global prices.
A high supply of wheat in the Black Sea region has also pushed down prices, while maize production in South Africa has a very positive outlook.
South Africa will likely remain a net maize exporter, which would positively influence prices as well.
However, internationally, there is general upward pressure on sugar prices.
Adverse weather patterns have negatively impacted global sugar prices, along with some increased trade restrictions, unfavourable for the year ahead.
Global food price inflation is expected to be influenced by the slowdown in global growth.
Weakening global food price inflation as a consequence of weakening global demand will assist in providing some moderation to South Africa’s food price and the overall inflation rate, while El Nino concerns are moderating for the country.