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Blog : 30 May 2016 (Retailers carrying some of the increased costs in Food prices or taking advantage of perceptions?)
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We take a look at South Africa's import inflation for graining and milling products compared to bread and cereal inflation as published in the Consumer Price Index (CPI). With the drought in South Africa rendering thousands of hectres of grain and related products useless, South Africa has been importing more grain and milling products to cover the shortfall.
Problem is the weak exchange rate has made the import prices of these items more expensive than what it would have been if it was locally produced. This in turn will lead to higher production costs and higher retail prices as retailers and producers look to offset increased costs by increasing prices. Below we take a look at the growth rates of both the bread and cereals CPI and the import prices of grain milling products. |
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The line chart to the right shows the year on year growth rates of both the Breads and cereals CPI and the Grain milling products UVI. A UVI is a unit value index. Its a derived price. The price is derived by dividing the import value by the import quantity. The UVI is lagged by one month.
Essentially we saying the import price of Grain milling products in say January 2016, will filter through and show up in February 2016's bread and cereal CPI. From the graphic its clear that in middle 2013, the price movement of grain and milling products were a lot higher than the inflation rate for breads and cereals, implying that retailers carried some of the increased costs by sacrificing margins. However from middle 2015 to March 2016, the official inflation rate for bread and cereals is a lot higher than the inflation rate of grain and milling products being imported. |
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Question is whether retailer's margins are so squeezed that they can't absorb the increased costs anymore, or whether they are taking advantage of the fact that there is a drought and the public is aware of it, and is expecting price increases, and retailers are increasing prices excessively to boost their margins. This is possible, considering the fact that the import inflation price for grains and milling products came in at 6.8% year on year for March 2016 (with the one month lag), yet breads and cereal inflation is sitting at 13.3% year on year. Thats almost double the import inflation price of grain and milling products.
It seems like retailers are exploiting public perceptions for financial gain. And the sad reaility is the fact that the poor will be hardest hit, as they spend a larger portion of their disposable income on food than the rich. As we showed in our SA consumer spending patterns article.
