Does inflation impact all South Africans equally?

By Arthur Kamp, Investment Economist at Sanlam Investments

May 19, 2016

SA’s consumer price inflation (CPI) figure was released this week, showing a slight slowdown to 6.2% for the year to end of April 2016. This was in line with expectations. But do all South Africans feel the pinch equally?

The poor and the rich experience different inflation rates
Statistics South Africa publishes CPI for five expenditure quintiles (with the poorest consumers represented by quintile 1 and the richest by quintile 5). The overall CPI for the total country increased 6.2 % in the year to April 2016. However, for quintile 1 (the poorest group of consumers) CPI increased 8.2% in the year to April 2016. In large part, this reflects the effect of food price inflation (11.3% in April 2016), which carries a materially higher weight in the basket of goods bought by the poorest consumers relative to the richest consumers. The inflation rate for quintile 5 (the richest consumers) was lower than the national average at 5.9% in April 2016.

The inflation rate for the poor is volatile
The inflation rate for the poorest consumers tends to be volatile because a high proportion of their expenditure is on food. Food prices, in turn, tend to be volatile because they reflect changes in soft commodity prices (for example wheat and maize), the rand and other factors such as current drought conditions. Historically, when food prices have spiked the inflation rate for poor consumers has been higher than for rich consumers.

We’ve seen wheat prices in particular spiking
Currently, therefore, poor consumers’ real income will be under considerable pressure as bread and other food prices increase. The price of bread and cereals, together, increased strongly by 14.9% in the year to April 2016. Bread accounts for close to 50% of the bread and cereal component of CPI. The increase in bread prices partly reflects the spike in wheat prices over the past year. Wheat accounts for a relatively small component of the overall price of bread (other factors contributing to the price of bread would include electricity, transport costs, wage costs, other costs associated with production and profit margins). However, the price increase for wheat has been especially sharp over the past year and so it’s making a material difference. We import a material amount of wheat and therefore its price has been heavily influenced by the fall in the rand.

What do the latest inflation figures mean for investors?
Overall inflation for South Africans is only marginally above the upper limit of the Reserve Bank’s target range. Despite low growth forecasts for the country, the Monetary Policy Committee has twice raised the repo rate during the first quarter of 2016. This indicates that they are serious about containing inflation and providing SA businesses with certainty around future prices, which is necessary to model future earnings growth and profitability. This stable price growth environment will benefit investors.

While the current situation, where food inflation exceeds average inflation, affects the poor more, the argument for above-inflation wage increases (without accompanying productivity) does not necessarily hold. In 90% of the months from January 2008 to March 2016 food inflation was actually lower than headline inflation. Exceptionally high food inflation is a recent phenomenon and only if sustained could it validate the demand for above-inflation wage increases. Accelerated wage increases would have a negative impact on companies that are – for various reasons – not able to pass all of the wage inflation on to the consumer. Investors who are invested in these businesses may find their returns come under pressure.

Source: Statistics SA and Daily Maverick, 2016

Disclaimer
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