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In this article we take a look at the year on year inflation rate of food in South Africa and compare it to South Africa's food products import inflation as calculated by Unit Value Indices (UVI) published by Statistics South Africa.
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Food inflation vs Food products import inflation
We recently covered the agricultural sector in more detail and discussed that while it is a very small sector for the South African economy it is a crucial one as it supply's the bulk of South Africa food needs and requirements. But this is not to say that South Africa doens't import any food and food related products. The Unit Value Index (UVI) for Food products is derived from South Africa's customs data and is published on a monthly basis by Statistics South Africa and its aim is to provide a guide as to import and export inflation of products entering and leaving the borders of South Africa.
From the graphic above 1 thing is immediately apparent. And that is the fact that the food products import inflation is far more volatile than the official food inflation of South Africa. While this is the case the overall trends are fairly similar (especially when some of the volatility in the food product imports inflation has been removed). While the food product import inflation is far more volatile than that of the official food inflation, over the period in question the average food inflation rate is sitting at 6.5% while the average food product imports inflation rate is sitting at 4.2%. So the consumer inflation rate is far greater than the average inflation rate of food product imports. Part of the reason for this is "sticky prices" which we discuss a little later in this article.
Volatility in the import prices can be attributed to a large extent to some of the following reasons:
So next up we look to remove the volatility in the food products import inflation.
Volatility in the import prices can be attributed to a large extent to some of the following reasons:
- Different importers importing from different suppliers from various countries
- Importers constantly looking for new suppliers supplying at cheaper prices
- Exchange rate volatility
- International commodity prices (especially with imports such as maize, wheat, soy etc)
So next up we look to remove the volatility in the food products import inflation.
So the next graphic below shows the food inflation rate and the 13 month moving average food products import inflation . The aim of the 13 month moving average is to reduce some of the volatility in the food products imports inflation series and identify the underlying trend in the series.
The graphic above shows that when the underlying trend in the Food products import inflation is calculated the series is far less volatile and is a lot closer to the food inflation in South Africa as measured by the consumer price index (CPI). We as consumers tend to think that prices only go up. It is human behaviour to remember price increases more than we remember prices that are falling. We also tend to overestimate the amount or percentage by which prices go up. But in actual fact food consumer prices tend to fluctuate substantially over time, but as shown above prices paid by importers of food and related products(be they retailers, wholesalers or manufacturers) are actually far more volatile. They tend to not pass on every single price move they experience on to consumers but rather changes prices on a far more subdued basis. But one thing that they (retailers, wholesalers and manufacturers) will rarely do is actually cut consumer prices (i.e food consumer inflation that is negative year over year). Even though they might experience significant price declines it is hardly passed on to consumers. This phenomenon is known as "sticky prices".
"Sticky prices" can be described as a case when prices tend to increase but are very slow to come down. The reason for this is that if inflation experienced by retailers, wholesalers and manufacturers decline or slow, they would like to keep prices high or at elevated levels for as long as possible as they would like to maximise their profits. And due to this even if they experience significant deflation on their input costs (such as the cost of importing goods) they will be slow to lower prices as they are looking to maximise profits.
"Sticky prices" can be described as a case when prices tend to increase but are very slow to come down. The reason for this is that if inflation experienced by retailers, wholesalers and manufacturers decline or slow, they would like to keep prices high or at elevated levels for as long as possible as they would like to maximise their profits. And due to this even if they experience significant deflation on their input costs (such as the cost of importing goods) they will be slow to lower prices as they are looking to maximise profits.