Hungrier price monster expected in 2019

Despite some relief, the higher fuel costs of the past months could result in so-called second-round effects, because producers could pass on higher input costs to the end consumer.

24 January 2019 | Economics

Over the past 6 years, prices increased by 34.9%. Simonis Storm

Jo-Maré Duddy – The price monster, expected to feed on higher inflation this year, is likely to be kept in check by lower oil prices and a favourable exchange rate, some local analysts say.

The purchasing power of consumers dropped from N$1 in 2012 to 74c last year, Simonis Storm (SS) says in its outlook for the first quarter of 2019. According to its calculations, prices increased by 34.9% over the past six years.

SS forecasts an average overall inflation rate of 5.4% this year, up from an average of 4.3% last year. 2018’s average inflation rate was the lowest since 2015.

The Economic Association of Namibia (EAN) expects overall inflation to remain within the band of 3% to 6% targeted by the South African Reserve Bank (SARB), a key consideration in monetary policy.

Food

EAN research associate, Klaus Schade, says white maize prices and wheat prices on the South African Futures Exchange (Safex) are currently 49% and 21% respectively higher than in January 2018. This could result in further price pressure on bread and cereals, he warns.

Bread and cereal inflation increased gradually throughout last year, but spiked in the last two months of 2018. Starting January 2018 at -4.7%, it ended the December at 7.9% and averaged the year at 1.6% compared to 0.5% in 2017.

Schade says the expected El Niño effect with below average to average rainfall this season in the region could result in further price increases for crops, vegetable and fruits. SS supports this notion.

“The World Meteorological Organisation (WMO) stated that there is a 75-80% chance of an El Niño developing by February to May 2019, however the effect is expected to be mild compared to 2015/16 El Niño,” SS says.

Average annual fruit inflation in 2018 was 9.5% compared to 5.2% in 2017, while vegetables recorded a rate of 5.7% compared to 1.3%.

Schade expects meat prices to decline further due to higher livestock marketing. Annual meat inflation started 2018 at 9.3%, dropping to 3.5% by year-end.

Transport

Steep hikes in the fuel prices in the latter part of last year were the main driver of inflation last year.

The inflation rate for operation of personal transport equipment – which includes the fuel price – started off 2018 at 5.2%, moved into double-digit territory last July and peaked at 15.5% in October. By December it had slacked down to 10.5%, following decreases in the fuel price. The overall rate for 2018 was 10.1% compared to 6.5% the previous year.

Despite significant price drops in December and this month, Schade points out that fuel prices remain higher than in January 2018, and will therefore contribute to the inflation rate.

Both SS and PSG Namibia expect oil prices to remain subdued in at least the current quarter.

Schade says changing global growth prospects, particularly progress in trade negotiations between China and the USA, Brexit negotiations, as well as monetary policy paths pursued by the US Federal Reserve and the European Central Bank could influence the oil price.

“In addition, output targets agreed by OPEC+ (mainly Saudi Arabia and Russia), adherence to targets, as well as output responses by US and Canadian shale oil producers will further influence global oil prices, while the exchange rate will impact on domestic fuel prices,” he says.

Despite some relief, the higher fuel costs of the past months could result in so-called second-round effects, because producers could pass on higher input costs to the end consumer, Schade says.

Both SS and PSG expect the rand and Namibian dollar to remain volatile. PSG sees it as an upside risk to inflation, while SS anticipates a “strong bias on an appreciation” - R12.90 against the US dollar by the end of 2019.

This should provide some respite for consumers, SS says.

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